10 big deductions too many of us miss – tax preparation
A lot of taxpayers don't know they can save thousands of dollars with these tax breaks. Did you forget about any of these deductions and credits
Charitable non-cash contributions
1 Charitable noncash contributions
2 Points on refinancing
3 Old points on refinancing
4 Health insurance premiums
5 Educator expenses
6 Higher education expenses
7 Energy Savings Home Improvement Credit
8 Investment and tax expenses
9 Casualty deductions
10 Retirement tax credit
Charity, as I hope everyone remembers, begins with a tax deduction. 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. Clothes and household goods must be in good or better condition to get the deduction.
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. Starting with 2007 returns, the law has required a receipt or some sort of written confirmation for all charitable donations. Feel lucky? 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 thrift store and check prices there. The Salvation Army also has value guides for donated items on its regional websites. (Or see the valuation guideline schedule on page 257 of the 2011 edition of my book "How to Pay Zero Taxes." Borrow it from the library if you don't want to buy it.)
And, of course, when you make your next donation, get that receipt
Points on refinancing
With interest rates remaining so low over the past few years, 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, 2010, for a 20-year term, seven out of 240 months will have passed before Dec. 31, 2010. If you paid $2,400 in points, you can write off $70 ($10 a month for seven months) for 2010.
You can write off $120 for 2011 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, 2009, and paid $2,400 in points. You refinanced again on June 1, 2010. You can deduct all the remaining points on the 2009 loan on your 2010 return. That's $2,280 plus the $50 you could deduct for January through May 2010. Likewise, if you refinance the 2010 loan in 2011 (provided interest rates stay low and a lender still likes you), you will be able to write off the remaining balance on your 2011 return.
Health insurance premiums
Any health insurance premiums you pay, including some long-term-care premiums based on your age, are potentially deductible. But you have to add these to your medical expense pot. Medical expenses have to exceed 7.5% of your adjusted gross income before they give you any tax benefit.
If you're self-employed and not covered by an employer-paid plan, though, you can deduct 100% your health insurance premiums (to the extent of your net income) "above the line." Above the line means the expense is included in adjusted gross income and doesn't get lumped in with itemized deductions. Not only do you not have to exceed the 7.5% floor, you don't even have to itemize.
The Small Business Jobs Act of 2010 changed the rules again. Now self-employed individuals can also deduct their health insurance premiums in computing their Social Security tax obligation.
Educator expenses
If you're a qualified educator, you can get an above-the-line deduction of as much as $250 for materials you bought in 2010. That includes books, supplies and even computer equipment.
You qualify if you're a kindergarten through grade 12 teacher, aide, instructor or principal.
Higher education expenses
If your adjusted gross income isn't more than $65,000 ($130,000 on a joint return), you get an above-the-line deduction of as much as $4,000 for any higher-education expenses you paid. Congress extended this 2009 tax break for 2010 as well.
See if you qualify for the American Opportunity Credit for the first four years of undergraduate work or the Lifetime Learning Credit, which includes postgraduate courses. The American Opportunity Credit is worth as much as $2,500 per student in 2010. The Lifetime Learning Credit is worth as much as $2,000 per return. Compare the credit with the deduction, and go with the one that gives you the bigger benefit. And if you don't qualify for either credit, you may still be able to deduct up to $4,000 in education expenses. You can't take both the credit and the deduction, though.
Energy Savings Home Improvement Credit
Credits are good because they are a dollar-for-dollar reduction in tax. This is a 30% credit for skylights, outside doors, windows, pigmented roofs, high-efficiency furnaces, water heaters and central air-conditioning units installed in your primary residence in 2009 and 2010. This credit for most improvements is capped at $1,500, but that's $1,500 off the cost of the improvements -- and you save energy as well. Homeowners who install alternative energy equipment, such as solar water heaters, geothermal heat pumps and wind turbines, can take a credit of 30% of the total cost, with no cap.
For a complete list of credits, see the IRS website.
Investment and tax expenses
Many of us forget tax-planning and investment expenses because they fall under miscellaneous itemized expenses. Further, the 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 subscriptions -- 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?
Casualty deductions
Last year brought forest and range fires aplenty, as well as floods and huge snowstorms. If the president declared where you live to be a disaster area, you could have claimed your loss on either your 2010 or your 2009 return. If you didn’t file Form 1040X (.pdf file) before, do it now to get relief.
Retirement tax credit
The retirement tax credit is designed to give moderate- and low-income taxpayers an incentive to save for retirement. If you make a contribution to your retirement account, that money isn't taxed currently. So it's like you get 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. Moreover, if you qualify, you can deduct as much as $5,000 ($6,000 if you're 50 or older) in contributions to an IRA.
The tax credit disappears as your adjusted gross income increases. But singles with adjusted gross incomes up to $27,750 and joint filers with AGIs up to $55,500 qualify. The limit is $41,625 for heads of households.
Contributions to 401k's, 403b's, Simplified Employee Pension plans, traditional and even Roth IRAs qualify.
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