This article was last updated on December 14
Now I am not talking about the tax deductions that you may have forgotten about or read in the main stream media during tax time, I mean the deductions you really may not have ever known about. Here are just some examples of legal tax deductions that I am talking about:
1.) Effective January 1, 2008, according to the “Mortgage Forgiveness Debt Relief Act of 2007,” for those eligible, no taxes will be owed on any mortgage debt forgiven or written off as part of a short sale, foreclosure, renegotiation, bankruptcy or other such action on a principal residence. Before the law was passed, such forgiven debt was typically taxed as income. While the debt relief portion of the housing relief act is making all the headlines, another provision that extends a mortgage-related tax deduction is likely to benefit more homeowners. The relief act also extends federal tax relief for homeowners with low down payment mortgages who pay mortgage insurance. The extension allows eligible homeowners to continue to deduct the cost of their government or private mortgage insurance premiums for three more years. Now, qualified borrowers will be able to take the deduction if their insured mortgage originates between 2007 and 2010, instead of just for the year of 2007. Qualified borrowers are families with an adjusted gross income of $100,000 or less. Families with incomes up to $109,000 are eligible for a partial deduction.
2.) Start up Costs. If you started a business, this is one of the big deduction areas people miss, usually because you’re typically spending your own money, and your business hasn’t been formed yet. Start-up activities are deductible. That can include the costs to get your business formed, bookkeeping costs to get your record system created, equipment and software costs, furniture, fixtures to store inventory on – there is a huge list of others. Refer to chapter 7 of Publication 535, Business Expenses and “chapter 8 section “Business Start up Cost” , for more information. [Andy – this could be useful to know if I classify this blog as a business!]
3.) Let’s say your income is too high to qualify for either the Hope Scholarship or the Lifetime Learning tax credit (that means adjusted gross income of more than $110,000 for married couples filing jointly or $55,000 for everyone else). You still may be able to deduct up to $4,000 of qualified college or other post-high school tuition and fees. But there’s no line for this on Form 1040. What do you do? Locate line 35, labeled “domestic production activities deduction,” write t in the blank space to the left, and enter your write-off.
4.) Volunteer work itself does not produce a tax deduction. However, your travel expenses getting to and from the volunteer location are deductible. If you use your car to help out once you get there (for example, delivering food to the needy for your church), that counts, too. You can take a standard deduction of 14 cents per mile on your tax return. Or, if it’s more advantageous and you kept track, you can deduct the actual cost of your gas for your philanthropic driving. With either choice, you also can include any parking fees or tolls paid.
5.) Some out-of-pocket expenses you pay for some sort of a qualified organization’s expenses and aren’t reimbursed could mean that these costs can count as charitable deductions. This might be buying stamps for a group’s mailings or purchasing office supplies for the organization’s administrative operations. And if your volunteer work requires you wear a uniform – say, as a Red Cross hospital aide – the cost of the clothing and of keeping it clean are deductible.
6.) If you make a contribution to virtually any retirement account (such as an IRA, 401(k), 403(b), or 457), you may be eligible for this credit. You really have to dig for this one, since most people won’t even look at the retirement contribution information reported on their W-2 forms. Use form 8880. Even if you use a computer program to complete your return, it’s possible to overlook reporting your 401(k) contributions. This credit is limited to the lower income tax payers, but if you qualify, it’s relatively easy.
7.) Business expenses are deductible, which isn’t a secret. What is unknown is that many every-day activities qualify for this deduction. Resume paper, resume envelopes, and printer ink are just a few of the items that meet this requirement. Looking for a new job. Keep track of your expenses and you could reduce your taxes.
8.) Gift taxes. This isn’t really a deduction but an issue that I am asked about a lot. It is also one that is missed a lot (generally by the donor).The main rules for gifts between individuals are fairly simple. These gifts don’t produce deductions for the donor or income for the recipient. And most of the time there’s no gift tax, either. But if you give more than the annual exclusion amount ($12,000 as of 2008) to one person other than your spouse in a single year, you’ll have some planning concerns — and a reporting obligation.
These are just a few of the unknown tax deductions that are out there among the 350+ legal deductions available! One of the best ways to make sure you get the most out of your taxes is by hiring a qualified professional to help you file. He or she will be able to make sure that you get as much money back as possible by taking advantage of “unknown” tax deductions. [Andy – I agree with this. From personal experience the money you could save on in taxes normally outweighs any professional fees]
The trick there is to make sure you divulge everything to your preparer. You should be mindful of your preparer’s abilities, but also know that your preparer isn’t a mind reader. Your preparer should ask lots of questions given information they already have from you. Your preparer works for you and their job is file your return accurately and make sure y
ou don’t pay a penny more in taxes than you owe.
Finally, my favorite quote to clients is “Not everything that counts can be counted, and not everything that can be counted Counts” (Albert Einstein). If you think it might be, could be, should be, or want it to be a tax deduction, keep the record of it and ask your tax professional.
For Year-end tax advice and potential savings see Tax Tips, Rates and Brackets for 2009 Returns
Standard disclaimer: All information provided here is for informational purposes and only the opinion of the author. Readers are encouraged to conduct their own independent due diligence and seek tailored professional advice.