Penalty Payment Deductions

• The Internal Revenue Service code specifies that no penalties of any sort are deductible. The code says that fines and penalties paid to any government agency for violations of the law are deductible. Failure to file tax returns or failure to pay taxes on time are considered violations of the law, and fall under the code that specifies that penalties, "regardless of their nature," are not deductible.
  
  

Interest on Back Taxes

• IRS code also specifies that personal interest, including interest paid on back or previously unpaid federal, state or local income taxes, is not tax deductible.
  
  

Other Personal Interest

• Besides tax penalties and interest paid on back taxes, some other personal-interest items have non-deductible status. You may not deduct interest on car loans, except when used for business purposes; finance charges associated with credit cards, revolving charge accounts or retail installment contracts; or late-payment fees imposed by a public utility.
  
  

Other Non-Deductible Fees

• Service charges, annual credit-card fees, fees charged in pursuing a loan, fees charged by a lender to access a credit report and interest to purchase tax-exempt securities are not deductible.
  
  

Itemizing Deductions

• Taxes, interest, medical expenses, charitable contributions and certain catastrophic losses may be claimed only if the taxpayer itemizes deductions. Use Form 1040 Schedule A to itemize deductions. Plan to itemize deductions if the total of allowable deductions and credits exceeds the standard deduction. For the 2010 tax year the standard deduction is $5,700 if filing as single or married filing separately, $11,400 if using the married-filing-jointly status or if the taxpayer meets the requirements and files as a qualifying widow(er), and $8,400 if claiming head-of-household status.
  
  

Considerations

• Itemizing taxpayers may deduct state and local income taxes or state and local sales taxes, but not both. Some tax credits, like the Earned Income Tax Credit, are refundable, limit tax liability and can be taken without itemizing deductions. The EITC helps low- to moderate-income earners obtain a refund even if no federal income tax was paid. Federal tax law changes each year. If unsure of the tax law or the accuracy of a return, contact a tax professional for advice.