It is possible to reduce your taxes by itemizing your deductions. Even if you have been itemizing for years, there are deductions that you may have overlooked. Some involve additional recordkeeping, but that extra effort can pay off in a big tax savings.
Many people don’t keep track of their medical deductions because most of the time they don’t have enough medical expenses to deduct. In order to deduct medical expenses, the expenses must exceed 7.5% of the Adjusted Gross Income. This can be quite a high bar. The following list has medical deductions that are frequently omitted, but can help reach and exceed the amount needed to be deductible:
1. Prescriptions
2. Payments to doctors, dentists, acupuncturists, osteopathics, chiropractors, psychologists, etc.
3. Contact lenses and the solutions for them
4. Hearing aids and the necessary batteries
5. Special dietthe costs of the special foods above the costs of the normal diet when prescribed by a doctor
6. Laser eye surgery, including LASIK and radial keratotomy
7. Health insurance premiums (unless they are pre-tax, as in a Section125 plan), including Medicare Parts A & B
8. Swimming. Prescribed therapeutic swimming costs including the costs of maintaining a pool in your back yard
9. Weigh loss program as a treatment for a specific disease. If your doctor diagnoses obesity, it will qualify. Foods for the program do not qualify (except as above special diets)
10. Insulin and diabetic testing supplies, including blood monitor
11. Mileage to and from physician’s office, labs, hospitals, clinics, etc. @ 18 cents a mile (2006 tax returns)
12. Smoking cessation programs and prescribed drugs to alleviate nicotine withdrawal
In the area of deductible taxes, all real estate taxes are deductible. The most frequently omitted tax is personal property tax (also called DMV or MVD) fees based on the value of your property.
Mortgage interest used to be simple. You had a mortgage and you deducted the interest. It is now quite a bit more complicated. You can deduct the interest on up to two homes (and you can choose each year which two to deduct). Indebtedness is limited, however, to $1,000,000 of deductible mortgage interest. You can have an additional $100,000 of home equity indebtedness. Both of these categories, home mortgage interest and home equity interest, are subject to other limitations and should be discussed with a knowledgeable tax professional before jumping to sign on the dotted line for the loans.
In addition, points paid on loan can be deducted in the year of purchase or deducted over the life of the loan. You might want to deduct the points over the life of the loan if you close late in the year and don’t have enough deductions to itemize the year you purchase the house.
Refinance points, however, must be deducted over the life of the loan.
Finally, on mortgage interest, in a time when many homeowners are having difficulty making their mortgage payments, late charges are generally considered deductible mortgage interest.
A final type of deducible interest that is often overlooked is investment interest. Interest paid to purchase investment property (stock, bonds, real estate, etc.) is deductible up to the amount of investment income received (ordinary dividends, interest).
Charitable contributions consist of money or property given to
1. churches, synagogues, temples, mosques, etc.
2. federal, state, or local governments for public purposes only
3. nonprofit schools, hospitals, and volunteer fire companies
4. Salvation Army, Goodwill, Red Cross, CARE, United Way, Boys & Girls Clubs, Boy/Girl Scouts
5. War veterans groups.
Rules on charitable contributions have become more restrictive in recent years. You must have a receipt for each cash contribution. Get that Bell Ringer outside the Mall to give you a receipt as you drop $5 in the bucket!
Keep track of the mileage driven for charitable purposes. It is deductible at 14 cents per mile (2006).
You can also deduct out-of-pocket expenses for volunteer activities, such as purchasing a Scout leader uniform.
When donating non-cash items (clothing, household goods, etc.), the new rules require that the items be in “good” or better condition. It has been suggested that you take a photo of each item, as well as listing it and its value for your records. When donating a vehicle, you can only deduct the value the charity receives upon sale (There are other details if it is not sold. Check with your tax professional.)
Casualty and Theft deductions are usually hard to take because you must subtract $100 and 10% of your adjust gross income, as well as any insurance reimbursement from the lesser of the item’s adjusted basis (or decrease in fair market value as a result of the incident, whichever is less)
Gambling losses can be taken to the extent of gambling winnings, which would at least help offset the winnings.
The following deductions are subject to a “2% floor”, meaning you can only take that portion which is more than 2% of your adjusted gross income”
1. Employees business expenses, unreimbursed
a. Travel
b. 50% of business meals and entertainment
c. Supplies
d. Professional books and journals
e. Home office deduction (If required by your employer)
f. Tools, special shoes, equipment
2. Hobby expenses to the extent of hobby income
3. Investment expenses
4. IRA, SEP, or SIMPLE fees paid directly (not deducted from your account)
5. Job-hunting expensed
6. Job-related education expenses
7. Professional and union dues
8. Safe deposit box
9. Tax preparation and other tax assistance expenses, and mileage to see tax professional
10. Work clothes and uniforms if required and not suitable for street wear.
As you can see, there are many deductions to be had if you take the time to assemble them and take the time to keep records.