How many times have you done your taxes and, three weeks later, learned you had missed the opportunity for a deduction? Too many, I’m sure. How can you not miss these deductions the next time? Start planning now.
I’ve found a number of deductions that my own clients often miss. Here are 10 of them that can affect your tax bill for 2003 and your tax planning for 2004.
Charity, as I hope everyone remembers, begins with a tax deduction. If you didn’t have the cash when it came time to contribute, I hope you charged it. The deduction is allowed in the year of charge, not when you actually pay the bill. Get a receipt from the charity to which you made a donation and, if you’re still worried about documentation, get the credit card company to send you their record of the transaction.
Now, let’s say you emptied your closets and gave everything to Goodwill or a similar charity. The value of your donated items — clothes, furniture, whatever — is deductible. Get a written receipt. With noncash charitable contributions, the rule is simple: No receipt means no deduction if you get audited.
If you've already dumped your old clothes in a Salvation Army box and walked away without a receipt, take the deduction anyway. You’ve legitimately made the contribution. You just may not be able to prove it in an audit. Play the audit lottery. You’re still an honest person. (If you can, reconstruct as much as you can the list of items you donated and then figure out their market value. The easiest way is to go to a Salvation Army or thrift store and check prices there. And then, of course, get that receipt.)
New points on refinancing
With interest rates so low over the past year, lots of homes have been refinanced, sometimes more than once.
Any points you pay to refinance your home can be deducted on a monthly basis over the life of the new loan. So, if you refinanced your mortgage on June 1, 2003, for a 20-year term, seven out of 240 months have passed. If you paid $2,400 in points, you can write off $70 ($10 a month for seven months) for 2003. You can write off $120 for 2004 and each year thereafter until the points have been deducted in full. The amount may not be huge, but every little bit helps.
Old points on refinancing
This is one deduction lots of people miss. All unamortized points on an old refinancing are deducted in the year of a new refinancing.
So, let’s say you refinanced on June 1, 2002, and paid $2,400 in points. You refinanced again on June 1, 2003. You can deduct all the remaining points on the 2002 loan. That’s $2,280 plus the $50 you could deduct for January through May in 2003. Likewise, if you refinance the 2003 loan in 2004, you will be able to write off the remaining balance on your 2003 points.
Health insurance premiums
Any health insurance premiums you pay, including some long-term care premiums based on your age, are potentially deductible. You have to add these, however, to your medical expense pot. Medical expenses have to exceed 7.5% of your adjusted gross income (AGI) before they give you any tax benefit.
But if you’re self-employed and not covered by any other employer-paid plan, you can deduct 100% your health insurance premiums above the line. Above the line means the expense is included in adjusted gross income and doesn’t get lumped in with itemized deductions. That means that you not only don’t have to exceed the 7.5% floor, you don’t even have to itemize!
Pay attention, teach! This is your last chance for this one.
If you’re a qualified educator, you can get an above the line deduction of as much as $250 for materials you bought in 2003. That includes books, supplies and even computer equipment. You qualify if you’re a kindergarten through grade 12 teacher, aide, instructor, or principal.
Unfortunately, this lovely special provision expired on Dec. 31, 2003. Now, all these educator expenses are allowed only as miscellaneous itemized deductions. You can deduct only the amount of your miscellaneous deductions that exceed 2% of your adjusted gross income.
Student higher education expenses
One for the teachers, one for the students.
For 2003, if your adjusted gross income isn’t more than $65,000 ($130,000 on a joint return), you can get an above the line deduction of as much as $3,000 for any higher education expenses you paid.
For 2004, the deduction can be as much as $4,000.
See if you qualify for the Hope or Lifetime Learning Credit. The Hope credit is worth $1,500 per student subject to income limits. The Lifetime Learning Credit is worth $2,000 per return. Compare, and go with the one which gives you the biggest benefit.
Clean fuel deduction
You can get another above the line deduction of up to $2,000 (dropping to $1,500 for 2004) of the cost of buying a clean fuel vehicle. That’s a car that uses a significant source of energy other than gasoline.
Hybrid cars qualify. A hybrid car combines an electric motor with a gas fueled internal combustion engine. Cars that the IRS has blessed include the Toyota Prius, the Honda Insight and the Honda Civic Hybrid.
You get the deduction in the year you start using the car, and you must be the original owner. Take it on your Form 1040 by writing in “clean fuel.”
Investment and tax expenses
Many of us forget tax planning and investment expenses because they are part of miscellaneous itemized expenses. Their total must exceed 2% of your adjusted gross income before you get any tax benefit.
Expenses to track include your employee business expenses, tax preparation fees and even the portion of your legal or accounting fees relating to tax planning. For example, in a divorce, the legal time spent relating to the tax aspects of alimony and child support would qualify. So too would the tax aspects of estate planning.
Many people shortchange themselves on the deduction of investment expenses. They remember the safety deposit box fees. But how about the annual fee paid your broker and any IRA fees you pay directly? You may remember the cost of your investment publications on subscription — such as Forbes, Fortune, Business Week, Worth and Barron's. But how about the investment newspapers you buy off the newsstands? You keep track of your long distance phone calls to your broker and investment adviser, but how about the mileage to go see them?
Last year, it was either too wet (think Hurricane Isabel in the East) or too dry (remember the wildfires in California).
If President Bush declared your area a disaster area, you can claim your loss either for 2003 or for 2002. You can confirm whether you qualify on the Federal Emergency Management Agency’s Web site.
If you do qualify, it may pay to file a revised 2002 tax return. For that you will need Form 1040X. (You can download that from the IRS Web site.) The tax rates were higher then. That means that any deduction would be worth more. You also should get interest back to April 15, 2003. Unless your income for 2003 was substantially less than 2002, that’s probably the way to go. At least numb some of the pain.
Retirement tax credit
This one is even better than a deduction. It’s a credit — a dollar for dollar reduction in your tax — not just in your taxable income. And, it also can come with a deduction.
This deduction is designed to give moderate and low-income taxpayers an incentive to save for retirement.
Make a contribution into your retirement account. That money isn’t taxed currently. So, it’s like you got a deduction off your income. In addition, you get a credit of as much as 50% of the first $2,000 invested. That’s as much as a $1,000 reduction in your tax.
You get the $1,000 tax reduction as well as the $2,000 reduction in your income. That’s a nice rate of return on a $2,000 investment.
The tax credit disappears as your adjusted gross income increases. But singles with AGIs up to $25,000 and joint filers with AGIs up to $50,000 will qualify. Contributions to your 401(k), 403(b), SEP, traditional or Roth IRAs will qualify as well.