With the start of the new tax year, the hunt for tax-lowering deductions and credits is officially on. But new opportunities are scarcer this year.
One makes mortgage insurance premiums deductible. But hold off on any celebration. It applies only to mortgages taken out in 2007, said Donna LeValley-Cocovinis, contributing editor of "J.K. Lasser’s Your Income Tax Guide 2008." Insurance premiums paid on mortgages taken out in earlier years are disqualified.
The deduction also begins phasing out at adjusted gross income levels of $100,000 for couples, and at $50,000 for singles.
Another change offers a credit of up to $5,000 for first-time homebuyers ... but only in Washington, D.C. It plays to such a narrow audience that cynics dubbed it the "freshmen congressmen" credit. But it phases out at income levels somewhat below what the average member of congress probably reports.
A homeowners’ credit with a much broader application, though in its final year of availability, is the residential energy credit. This is a "gift" for anyone who did not exhaust the $500 maximum credit in 2006 and made qualifying repairs in 2007. Such repairs would have improved energy efficiency — whether done intentionally or out of necessity. With new windows and doors among the qualifying improvements, the credit offers a low threshold for accessibility.
While new deductions and credits may be scarce this year, there are still plenty of opportunities for reducing taxes.
Here is a sampling of some of legitimate tax reduction opportunities identified by tax experts including attorney Barbara Weltman, author of "J.K. Lasser's 1001 Deductions and Tax Breaks 2008":
What goes on in Vegas not only stays in Vegas, it may be deductible.
“Losses on lottery tickets, racing and even casino gambling can be used to offset gambling gains if the paperwork is maintained,’’ says Weltman. This is helpful since gambling-related winnings are fully taxable as ordinary income.
But while some tax good can be found from holding onto losing lottery tickets, gambling losses can only be used to the extent they offset winnings. If they exceed winnings, they cannot be used to offset ordinary income the way losses realized on stock investments can be, for example.
When charity begins at home
It is not just the checks written to qualifying charities or donations of gently used clothing and household items that may be deductible. Charitable gestures may also be, such as a portion of the expense of hosting an exchange student if a qualifying not-for-profit organization facilitated the program.
Just leaving home for charity may also be deductible.
“You can take a deduction for the mileage you incur in performing [qualified] charitable work,” confirms Dan Fuller, senior tax director in the Grand Rapids, Mich., office of BDO Seidman LLC. “Many in our area for example, have made trips to New Orleans in the last year as volunteers for various charitable organizations. At 14 cents a mile, that can add up.”
While donations of money to charitable causes are typically deductible, donating something more personal, like blood, is not, according to Weltman. Nor in this season of presidential primaries, is a donation to a political campaign.
For more information on taking charitable deductions see IRS Publication 526.
Do not count medical expenses out
Because medical expenses are only deductible to the extent they exceed 7.5 percent of adjusted gross income, the relatively healthy and well-insured tend to assume there is little point in adding up their out-of-pocket expenses each year.
”But people often don’t realize how much they can legitimately include in order to reach that level,” says Fuller.
This is especially true for those who contribute to their parents’ medical expenses. While Mom’s or Dad’s Social Security income may prevent them from qualifying as dependents for tax purposes, adult children paying more than half of their parents’ financial support, including any qualifying medical expenses, may be able to add those expenses in with the rest of their household’s when calculating the medical expense deduction.
The IRS is fairly liberal regarding deductible medical expenses. Lamaze classes, contact lens replacement insurance, treatments to quit smoking, reclining chairs and elastic hosiery can all be deductible. (See IRS Publication 502 for guidance.)
Long-term care insurance premiums also qualify as medical expenses. While those age 40 or younger can only deduct $290 for 2007, taxpayers age 71 and older may deduct up to $3,680, which makes beating that 7.5 percent minimum much easier.
“For more unusual health write-offs [like those requiring home improvements], get a note from your doctor stating why the expense was medically necessary,” advises Weltman.
“Certain professions receive special treatment for job-related expenses,” she observes. National Guardsmen and reservists, for instance, may be able to deduct some of their travel expenses for trips over 100 miles.
Teachers and teachers’ aides may take a $250 deduction for the supplies they buy for their classrooms.
Performing artists such as musicians, actors and dancers are allowed to deduct all their job-related expenses directly on Form 1040 — bypassing the typical income limitations — as long as they meet certain income criteria.
For most employees, deductions may be available for unreimbursed job-related expenses including subscriptions for work-related publications, business calls made on a personal cell phone or long distance calls made from a home phone. The caveat is that to get a deduction the total of all such miscellaneous expenses needs to exceed 2 percent of adjusted gross income.
In years where expenses related to job hunting can be added to the miscellaneous deduction mix, the odds of exceeding that 2 percent level improve immensely. It is not just the cost of printing new resumes, but the cost of traveling to the interviews along with resulting phone calls which may qualify as deductions.
If the job search results in moving expenses, they too may be deductible.
The primary caveats are that the job being sought cannot be the taxpayer’s first, and the expenses incurred cannot lead to a new profession. For more information on what qualifies see the IRS Web site’s rather user-friendly article on this topic.
Finding deductions is hardly a challenge. Even the IRS offers suggestions on its Web site and tax software companies, like TurboTax, include deduction finding applications within their packages. Finding the time to determine just how many you qualify for, however, may be the bigger challenge.