Taxes available for use as deductions are limited

I understand that a great amount of the price we
pay for cigarettes and alcohol is made up of taxes. Are these taxes considered
"other taxes" for purposes of itemized deductions? If so, how should we account
for these amounts? The receipts for purchases don't list the taxes separately.

D.S., Indianapolis

Don't worry about saving receipts for liquor and tobacco products. There is no deduction allowed for the taxes on these items, even though the tax represents a large portion of the purchase price. There are lots of other taxes that we all pay, taxes that raise the prices but that don't add up to a higher tax deduction. For example, fuel taxes, pet licenses, sales tax (which was deductible until not very long ago), social security and medicare tax, and utility taxes. The taxes you can deduct as itemized deductions are limited to only a handful of the taxes we pay. Deductions are allowed are for the following types of taxes:

  • state and local income taxes
  • property taxes including real estate taxes
  • foreign income taxes (usually taken as a tax credit
    instead of an itemized deduction)
  • 50% of self employment tax (taken as an adjustment to
    income rather than an itemized deduction)
  • transfer tax on securities
  • assessments for repairs and maintenance as well as interest charges for special improvements (such as sidewalks and sewer systems), note that the interest charges on these items are deductible, but as a tax rather than an interest expense

My tenants pay me in checks that are made out to
me personally. I deposit these checks in my bank account, along with other
amounts. Short of opening a separate bank account for my rental units, what's
the best way of keeping track of all the income so that the IRS won't think
other amounts I deposit are rental income too?

C.Y., Greenwood

I vote for a separate bank account for the rental property, just because it makes the record-keeping so much easier. If you are determined not to open a separate account, the next best thing (and something you should do in any case) is to keep a journal of all the deposits in your main bank account. Identify which amounts represent income from your rental units, and identify all other deposits as well.

In addition to a written record of the bank deposits for rent income, keep records that indicate the names of your tenants, the number of months they rented from you and the amount of rent you charged. The information in these tenant records should agree with the amounts you show as bank deposits.

You can usually start discarding receipts that support the numbers on your tax return three years after you filed the tax return (or the due date for that return, whichever is later) on which you reported the amounts. Because rental income relates to property which usually hangs around on your tax return for more than three years (depreciation expense will keep a piece of rental property on your tax return for a long time), you may want to be a bit more conservative and hang on to rental-related tax records for something closer to seven years.

My sister doesn't work and receives welfare
payments. Is she supposed to pay taxes on these payments?

R.C., Indianapolis

Most public assistance payments are not taxable and don't even get reported on a tax return. A major exception to the rule is unemployment compensation, which is taxable.

Are proceeds from life insurance policies
taxable? I received a small amount as the beneficiary of a relative and am not
sure how to list it on my tax return, or if I even have to.

T.B., Indianapolis

The amount you receive as a beneficiary of a life insurance policy is not subject to income tax. The amount doesn't get listed on your tax return. If you receive the insurance payments over a period of time instead of all at once, there may be interest associated with the payments. This interest is subject to income tax just like other interest income, but the part of the payment representing insurance proceeds is not taxable.

You may like these other stories...

Legislation coming out of Washington just might reduce homeowners' burden for disaster insurance. It's a topic very much on everyone's minds since the mudslide in Oso, Washington. The loss of human life was...
Divorce is hard, and the IRS isn't going to make it any easier. The IRS generally says "no" to tax deductions that might ease the pain of divorce. In certain circumstances, however, you might be able to salvage...
IRS chief: New rule on the way for tax-exempt groupsIRS Commissioner John Koskinen told the USA Today on Monday that the agency will likely rewrite a proposed rule regulating the political activities of nonprofit groups to...

Upcoming CPE Webinars

Apr 17
In this exciting presentation Excel expert David H. Ringstrom, CPA shares tricks that you can use with pivot tables every day. Remember, either you work Excel, or it works you!
Apr 22
Is everyone at your organization meeting your client service expectations? Let client service expert, Kristen Rampe, CPA help you establish a reputation of top-tier service in every facet of your firm during this one hour webinar.
Apr 24
In this session Excel expert David Ringstrom, CPA introduces you to a powerful but underutilized macro feature in Excel.
Apr 25
This material focuses on the principles of accounting for non-profit organizations' revenues. It will include discussions of revenue recognition for cash and non-cash contributions as well as other revenues commonly received by non-profit organizations.