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Tax deductions 2005
5 Tips: Getting the most from your tax return.
April 1, 2005: 9:24 AM EST
By Gerri Willis, CNN/Money contributing columnist
 
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CNN's Gerri Willis reports on how to maximize your tax deductions.
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NEW YORK (CNN/Money) - If you want to keep from owing Uncle Sam money this April 15th, you'll want to take full advantage of the deductions due you.

They are out there in abundance. According to the IRS's most recent numbers, those filers who itemized back in 2002 deducted an average of $19,673 from their taxes.

But you'll need to go further than just the good old mortgage interest deduction to find your savings. Dig up your deductions with today's five tips.

1. Shop 'til you drop your taxes.

For the first time in nearly a decade, you can either deduct your state income tax or your state sales tax. If you had some rather extreme shopping habits this year, i.e. you bought a yacht, this could work out nicely for you.

Deducting your income taxes will generally be the better break, but tax experts say if you made a major purchase in 2004 such as a car or boat, you might want to compare which is the larger deduction. This is also a nice bonus for taxpayers living in low- or no-income tax states. There is currently no state income tax in: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.

To figure out what your state sales tax total was, take a look at your receipts from big-ticket items or refer to tables on theIRS Web site.

2. Make your gifts count.

Last year's spring-cleaning can really pay off. If you donated items worth more than $500 to Goodwill, the Salvation Army and others, you must include a written description or the charity's receipt of the items.

And don't forget to include the receipts or cancelled checks for donations you made to the local fire department, United Way, or other charities. Remember, those have to be donations, and not payment for a function or a box of cookies.

You also get a bonus for your generosity to the Tsunami relief efforts: Money donations made up until January 31st will count toward your 2004 taxes (the usual deadline is December 31st). So speed that tax benefit up a full year. Unfortunately, a deduction on the clothing, food, and tools you donated will have to wait until your 2005 tax filing.

3. Work it from home.

So you work in sweatpants and pink slippers. There is nothing to be ashamed of come tax time. You can get a sizeable deduction for your home office.

Kay Bell, the tax editor at Bankrate.com, says of the home office deduction, "This is one a lot of people shy away from. There is a fear that if you do something different, the IRS will take a longer look at your return."

The truth is this is not an oddball deduction. It's one that many people should be taking advantage of: 44 million people, or nearly a third of our country's workforce regularly works from home, according to In-Stat/MDR.

Bell says the rule is you have to have a space in your home that is used exclusively and regularly for your work. (The old laptop at the kitchen table doesn't count.)

You'll need to calculate what percentage of your home is used for business. That percentage will help you deduct a portion of your mortgage interest, real estate taxes, and even utilities used by your home office. Check out Form 8829 on the IRS Web site.

4. Take your medicine.

For your serious out-of-pocket pain, the IRS has some relief. If you've spent 7.5 percent of your adjusted gross income on medical expenses, you can deduct them.

That chunk of change might make for some heavy medical bills, but you can do a few things to get there. For one thing, don't forget all the expenses. If you drive an hour to a certain specialist, count the mileage. The IRS will give you $0.14 cents a mile. For 1,000 miles driven in a year, you can deduct $140. If you have your receipts for gas to drive you to those appointments: even better.

Don't forget the deduction for the eyeglasses you paid for without insurance. And include the cost of the quit-smoking program you took too. But don't think about getting deductions on your over-the-counter medications: your tax benefits there lie in your employer's flexible spending account programs.

If your family has high medical bills, but you're running short of the 7.5 percent threshold, you might consider filing separately, letting the spouse with the lower income claim the whole family's medical expenses. But keep in mind that filing separately can cut you out of other tax breaks, so weigh both options.

5. Don't get too creative.

You've heard the stories -- people who deduct their kids' allowance, exotic dancers who deduct breast implants. You could win in the long run, but the cost of fighting the IRS is high.

What's more, they have three years to come back and say they are going to audit you. If they suspect fraud, they can audit you as far back in time as they like.

Gerri Willis is a personal finance editor for CNN Business News and the host for Open House. E-mail comments to 5tips@cnn.com.

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Maximize Your Tax Deductions

Wonder whether it will pay to itemize your deductions?

If you feel pressured at tax time, you may be tempted to settle for the standard deductions and exemptions, rather than going through all the work of itemizing your deductions. But if you don't explore itemizing, you may end up paying more taxes than you really owe. Should you itemize?

To figure out whether itemizing would be profitable for you, consider some of the factors that affect what you can deduct, such as home ownership, taxes, charitable donations, medical expenses, and miscellaneous expenses. Compare your potential deduction with the standard deduction you're entitled to:

  • Standard deduction for single taxpayers - $4,850
  • Standard deduction for married taxpayers filing a joint return - $9,700
  • Standard deduction for head of household taxpayers - $7,150

If you're 65 or older or blind, you get to increase the standard deduction by this additional amount:

Single or Head of Household:

65 or older

$1,200

Blind

$1,200

Married or Widow(er)

One spouse 65 or older or blind

$950

One spouse 65 or older and blind

$1,900

Both spouses 65 or older

$2,850

Both spouses 65 or older and blind

$3,800

Now that you know how much your standard deduction would be, consider how well you will do with itemized deductions, in these areas:

If You Own a Home

Many taxpayers take the standard deduction rather than itemizing their deductions, even though some taxpayers with mortgages or home equity loans could have saved money by itemizing. If you have a mortgage or home equity loan on your home, fill out Schedule A to see if your itemized deductions are larger than the standard deduction to which you're entitled.

In January, your mortgage lender should provide the amount of mortgage interest you paid during the previous year. Look for Form 1098, Mortgage Interest Statement. If you paid points as part of the financing for your home, the points will also be shown on that form. Tip: Mortgage lenders sometimes attach Form 1098 to your December or January mortgage bill.

Here's a quick rule of thumb. Compare your mortgage interest (plus any points paid on the purchase of your residence) with your standard deduction.

Caution: Points paid on the refinancing of your mortgage are not fully deductible in the year paid. Instead, they must be deducted over the life of the loan. For more information, consult IRS Publication 936, Home Mortgage Interest Deduction.

If the interest you paid on your mortgage is larger than the applicable standard deduction, you should itemize your deductions.

If your interest is lower than the standard deduction that applies to you, add the real estate taxes you paid on your home to the interest amount you also paid and compare again. Your real estate taxes are also deductible.

  • Many lenders provide a year-end tax summary that includes any real estate taxes and insurance paid through impound accounts. The real estate taxes are deductible, but homeowner's insurance and homeowner's association fees are not.
  • If your real estate taxes aren't paid through an escrow account, review your property tax bills and cancelled checks and add up what you paid. You can't deduct any penalties you paid for late payment of property taxes: you can only deduct the actual taxes assessed and paid.

If You Don’t Own a Home

If you don't own a home, look at the income taxes that you paid to your state, and to your city or county, if applicable. Income taxes you pay to these governments are usually deductible. If you have a sizeable amount of these taxes withheld from your paycheck, add up the state and city taxes shown in boxes 17 and 19 on your W-2s and compare the total to your standard deduction.

If you made estimated tax payments to your state or local government, be sure to total those along with any money you sent with your 2003 state and local tax returns in April of 2004. You can also deduct overpayment amounts. If you had an overpayment on your 2003 state or local tax return and asked the government to apply it to your 2004 taxes instead of requesting a refund check, the amount that you overpaid is deductible.

Charitable Donations

You can deduct charitable donations only if you itemize your deductions. Add up the money you donated to organizations like the Red Cross, churches, synagogues, mosques, and other nonprofit organizations. If you donated things like clothes, furniture, appliances, or vehicles, you need to determine the cash value of those items. One way is to find out what your local thrift shop is charging for similarly used items or you could use a software program like ItsDeductible that does this work for you. ItsDeductible determines and assigns actual fair market valuation to thousand of commonly donated items ensuring that you maximize your tax savings.

Make sure you use good judgment and that you don't overvalue your donations. For more information, see How to Place a Value on Your Charitable Contributions.

Medical Expenses

Some of your medical expenses are also deductible as long as your total medical expenses exceed 7-1/2% of your income. Before you go through all of your doctors' bills and prescription receipts, do a quick calculation based on your income to make sure your time will be well spent.

Deductible medical expenses include doctors' and dentists' fees, chiropractors' fees, lab fees, contact lenses, glasses, prescription drugs and medical supplies.

Caution: If you have medical insurance, make sure that you don't deduct the medical costs that were either paid or reimbursed by your insurance company.

You can deduct the premiums you pay for health insurance coverage, unless your employer pays for your coverage through a payroll deduction using pre-tax dollars. If so, you've already received a tax benefit for your premium payments, so don't deduct those premiums on your return. Consult your employer's benefits department if you're not sure.

Miscellaneous Deductions

Most of the remaining deductions are subject to a limitation similar to the one for medical expenses.

  1. Review the miscellaneous deductions listed below.
  2. Add up the ones you can take.
  3. Calculate 2% of your adjusted gross income.
  4. Compare the two figures.

If the total of miscellaneous deductions is larger than 2% of your adjusted gross income, subtract the 2% figure from your total miscellaneous deductions. The difference is the amount you can actually deduct on your return.

If the total of miscellaneous deductions is less than 2% of your adjusted gross income, you can't deduct any of these items.

Examples of miscellaneous expenses that you could deduct include:

  • Dues you pay to a union or a professional organization in connection with your employment
  • Subscriptions to magazines and other publications that are related to your work
  • Business liability insurance premiums
  • The cost of protective work clothing, such as hard hats or safety shoes and glasses, and the cost of uniforms you're required to wear to work
  • Tools and supplies used in your work
  • Medical examinations required by an employer
  • Tuition for classes that maintain or improve the skills required for your present job
  • Expenses you incur while looking for a job in the same line of work you normally do (examples: resume' costs, career counseling, and employment agency fees)
  • Depreciation on your computer or cellular phone, but only for the part of the time you use your equipment to keep track of your taxable investments (stocks, bonds, mutual funds) or as part of your job, if required by your employer
  • The fees you're charged by your financial institution to maintain your IRA account, but only if you pay them from funds outside of your IRA account (if your financial institution just deducts the maintenance fees directly from your IRA, you can't deduct them)
  • Safe deposit box rental fees, if you use the box to store stocks, bonds, or other investment-related documents (if you just store jewelry and other personal items there, the fees aren't deductible)
  • What you pay to get your taxes done, whether it's by a professional or with tax preparation software. You can also deduct the cost of any books or publications that help you with preparing your return, and, if you file your return electronically, you can deduct any costs associated with that process
  • Legal fees that you pay to protect your taxable income, or to produce your taxable income (This includes fees for legal assistance for helping you keep your job, for tax planning or investment counseling, or for handling an audit of your tax return. Legal fees for divorces aren't deductible, except for any portion specifically related to helping you collect alimony payments or for advice about the taxability of your alimony. You can only deduct legal fees that you pay in your efforts to collect income that's taxable to you.)

There are many other expenses that you can deduct. For example, if you're involved in estates, trusts, and investments, or if you have significant job-related expenses, it's worth your time to investigate a bit further. For more information, see IRS Publication 529, Miscellaneous Deductions.

Another way to find more deductions is to use tax preparation software. Tax preparation software such as TurboTax can help you decide whether you should itemize your deductions. Simply enter all of your information when prompted, and let the program determine if it's better for you to itemize or take the standard deduction.

  

OWEN GERONIMO

Mortgage Loan Consultant

owengeronimo@gmail.com

(415) 724-9294 Phone

www.owengeronimo.com