Tax Deductions Many People Overlook

2006-02-18

It happens all the time throughout America. In a rush to do your taxes fast and get your refund, you realize on after the fact that you missed some potentially big deductions.

In preparing for your taxes keep these commonly missed deductions in mind during planning.

Noncash contributions
Charity contributions such as old furniture, clothing, toys, etc. shouldn't be forgotten. The deduction is allowed in the year of the contribution. Don't just go to a drop box and throw those bags of clothes into the bin unless someone is there to write you a receipt. Take them to the Good Will or Trift store and have the clerk give you a receipt from the charity to which you made a donation.

Now, that you've emptied the closets and garage let's assign those items a value. There are many programs out there that will also you to type in the items donated and will return you a value. You can even write off the purchase of the program as a tax preparation expense. With charitable contributions, the rule is simple: No receipt means means no deduction if you are ever audited.

If you've already dumped your old clothes in a Charitable Donation 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. Use the inventory program you purchased and build a list of as many items you can remember and assign them a value.

Mortgage Points
Any points you pay to refinance your home can be deducted on a monthly basis over the life of your new loan. So, if you refinanced your mortgage on August 1st for a 30-year term, five out of 360 months will have passed after Dec. 31. If you paid $3,600 in points, you can write off $50 - $10 a month for five months. You can write off $120 for each year thereafter until the points have been deducted in full.

Health insurance premiums
Any medical insurance premiums you pay 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. Also, if you paid for your spouse or children through your employer you can take the deduction only if you paid the premiums with after tax dollars.

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!

Also don't forget about your supplemental health plans like cancer policies, accident policies, etc. Many of these fall under the health insurance premium umbrella.

Teacher and Educator expenses
If you're a qualified teacher or educator, you can get an above the line deduction of as much as $250 for materials you buy in a calender year. Items included are books, supplies and even computer equipment. If you're a kindergarten through grade 12 teacher, aide, instructor, or principal you qualify for the deduction.

*Note - This law is supposed to expire after 2005. So, if you take the deduction this year, watch to see what happens next year.

Student higher education expenses
For 2005, 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 $4,000 for any higher education expenses you paid. That is unchanged from 2004.

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 in 2004 and 2005 of the cost of buying a clean fuel vehicle. A clean fuel vehicle is a car or SUV that uses a significant source of energy other than gasoline. The deduction falls to $1,500 in 2006 and, unless Congress renews it, will not apply to vehicles placed in service after 2006.

New Hybrid cars qualify for the deduction. A hybrid car combines an electric motor with a gas fueled internal combustion engine.

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.

Keep track of the following ex expenses - your employee business expenses, tax preparation fees, estste planning and your accounting or legal fees related to tax planning.

Many people shortchange themselves on the deduction of investment expenses. Things like safety deposit box fees, annual fees paid your broker, any IRA fees you pay directly, investment publications on subscription, investment newspapers you buy off the newsstands, long distance phone calls and mileage to go see your broker and investment adviser.

Retirement tax credit
This is a credit not a deduction. It's a dollar for dollar reduction in your tax not just in your taxable income. And, it can even come with a deduction.

For example, make a contribution into your retirement account. That money isn't taxed currently. So, you get to take a deduction off your income. You also 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. Moreover, if you qualify, you can deduct as much as $3,000 in contributions to an IRA.

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. The limit is $37,500 for heads of households.

Contributions to your 401(k), 403(b), SEP, traditional or Roth IRAs will qualify as well.

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