As Mom always used to say, “Every little bit helps.” She may have been referring to putting money away in the piggy bank, but those words of wisdom can also apply to saving money on your taxes.
You can always claim the standard deduction ($5,000 for single filers, $10,000 for married couples filing jointly), which is usually the best bet for people with uncomplicated tax situations. But depending on the amount of your charitable contributions, home mortgage payments, state taxes and business expenses, your actual deductions could be several times the standard deduction. In that case, you're missing out if you don't itemize.
To help you lower your tax bill, here is a list of often-overlooked credits and reductions to check out before sending in your tax return.
Generally, you cannot contribute more than 50 percent of your adjusted gross income (AGI), but due to Hurricane Katrina, the IRS waived that restriction for charitable gifts made between Aug. 28 and Dec. 31, and the limits are removed for any gift, regardless of the organization’s designated cause.
Acknowledgment of your largesse is necessary when your gifts are large. For a contribution of $250 or more, you must get a written receipt of your donation from the qualified organization before you can claim the deduction. Many donors are generous but not organized, says Mark Luscombe, principal analyst for tax information provider CCH Incorporated. “Most people are good at keeping track of donations by check, but not of cash or donated goods.”
Which means you might forget to deduct all that you've given to charitable organizations, particularly if you've given cash gifts or "in-kind" donations of clothing or appliances that you can then deduct at fair-market value (i.e. what your local Goodwill will get for the item).
If you didn't keep all your receipts, Luscombe suggests you go through your check register, look through old credit card statements or give a detailed explanation of the donation, including date and amount. Remember that donations must be made to qualified organizations, not individuals.
Whether you're using a 529 to save for your toddler’s college education, struggling to make tuition payments today or still paying off your own college degree, there are education-related deductions and credits for nearly every stage. There are far too many to list here, although most deductions are related to higher education. The IRS has an 82-page explanation of education tax benefits available for download from its Web site.
Home office deduction
Nearly a third of the U.S. workforce regularly works at home, but few of them are likely to claim these deductions. That’s because many of them simply don't meet the IRS's strict criteria. But if you're self-employed, your home office is your principal place of work, and your gross income is more than your related deductions, you should pass the first litmus test.
If you're a company employee, however, you can only deduct the home office if it is for your employer’s convenience. That means if you are encouraged to work at home to save the company office space, you could claim a deduction for the expenses your company doesn't reimburse. But if you negotiated with your boss for the extra perk of working from home a few days a week, no go.
Your office also needs to be a specific area of your home that is only used for business. So if you write legal briefs at a desk in your den where your kids also play, you won’t pass the “exclusive use” rule. If you do have a specific home office space, the IRS allows you to deduct a portion of your home’s expenses, including mortgage or rent, utilities and repairs.
This year, you have the option of deducting your state sales tax or your state income tax. Which should you take?
While this deduction will mainly benefit taxpayers with a state or local sales tax but no income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming), it may give a larger deduction to any taxpayer who paid more in sales taxes than income taxes. For example, you may have bought a new house, car, motor home or boat, which boosted your sales tax total, or you claimed tax credits, thereby lowering your state income tax.
If your state levies both, compare your state and local income tax with the IRS sales tax table in Publication 600 for your state. To get the forms, call the IRS at 800-829-3676.
Most people don't get a medical deduction because your medical expenses need to exceed 7.5 percent of your AGI before you are allowed to deduct them. So if your income is $100,000 and you have $10,000 in eligible expenses, you can deduct expenses above and beyond $7,500.
That's a high hurdle, but according to Cindy Hockenberry, tax information analyst for the National Association of Tax Professionals, the IRS is becoming more generous about what can qualify. “Now it allows weight loss programs, smoke cessation programs, even a health club membership if prescribed by your doctor, to qualify.”
Other approved expenses include premiums for long-term health care insurance, mileage to and from appointments, over-the-counter medication, contact lenses, prescription birth control and fertility treatments.
Like it sounds, this category includes everything from business expenses to gambling losses. Your total miscellaneous expenses must exceed 2 percent of your adjusted gross income before you can start tallying these deductions. They include:
- Gambling losses: If you won big in Las Vegas, you have to pay taxes on your winnings, but you can offset some of your gains with gambling losses. "People don't realize that their gambling losses are deductible," said Hockenberry.
- Job search expenses: If you were job-hunting last year, you can deduct most expenses related to your search, including the cost of resumes, phone expenses, postage, career counseling and travel to and from your interviews. Forget about deducting your interview suits – the only clothing deduction allowed is for a work uniform.
- Investment expenses: These include everything from brokerage and IRA account-maintenance fees to safe-deposit boxes and subscriptions to investment publications.
- Tax return preparation: Two main benefits of hiring an accountant or using tax software to file your return -- not only will you have more of a chance to claim deductions you might have otherwise been unaware of, the cost of filing your taxes is yet another deductible miscellaneous expense.