Tax deductions: 12 ways to save, from mortgage interest to moving costs
Tax deductions can require some extra reading of instructions, but there's big money to be saved when you file your tax return.
When you file your tax return, don't forget to pay yourself by taking advantage of available deductions.
These tax-code provisions provide big savings, but it can require some reading of instructions to make sure you don't make a mistake. And make sure you keep documentation like receipts in case you get an Internal Revenue Service audit.
Here's a quick guide to deductions â€“ some commonly used and some little-known â€“ that might lower your tax bill.
Standard deduction.Â This is designed to give a break to people whoÂ don't "itemize" other tax breaks. This year, the standard deductionÂ will knock $5,800 off of taxable income for the typical single person,Â and twice that for couples filing jointly. You can itemize (list otherÂ deductions by filing Schedule A) or you can take this one, but youÂ can't do both.
Qualifying IRA contributions. An individual retirement arrangement (IRA) is one of the most popular ways to save for retirement. The IRS says you "may be able to deduct some or all of your contributions to a traditional IRA," but not to a Roth IRA, which grants tax benefits at the time of withdrawal. "You may also be eligible for a tax credit equal to a percentage of your contribution."
Some filers will face limits in claiming this deduction, but for most workers it can cover $5,000 in contributions, or $6,000 if you're over age 50. And there's still time to make a deductible contribution for the 2011 tax year, up through April 15. Just be sure to your financial firm knows which tax year you're aiming for when you write a check.
Bad debts. If someone owes you money you can't collect, you may be able to adjust your taxable income downward. "To deduct a bad debt, you must have previously included the amount in your income or loaned out your cash," the IRS says. So you can't deduct when, say, you do work and never get paid for it. The IRS also says money you lend to a relative or friend, with the understanding that it may never be repaid, is a gift rather than a loan.
Moving expenses. If you're a member of the armed forces, moving expenses are deductible. Or, if you moved because of a job switch, related expenses may be deductible if the new workplace is at least 50 miles further away (from your old home) than your previous workplace was. You also need to keep working for at least 39 weeks after arriving in your new home.
Education expenses. A student loan interest deduction (up to $2,500) and a tuition-and-fees deduction (up to $4,000) are available for you or a spouse or dependent, even if you don't itemize other deductions on your return. School teachers can use an "educator expense deduction" for up to $250 in unreimbursed expenses.
Alimony. You can deduct alimony payments, but the IRS doesn't give any deduction for child-support payments.
Disaster losses. The IRS casts a helpfully wide net on this one, including theft or other unusual events "such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption." Generally you may deduct related losses of property relating to your home, household items, or vehicles. But the tax agency says that for losses covered by insurance, you must file timely claims and reduce the deduction by the amount of any reimbursement.
Home mortgages. Yep, this is the ever-popular mortgage interest deduction, which pushes many families into the "itemizing" category. In addition to deducting the interest portion of monthly home payments, you can also deduct a "points" fee paid when taking out the home loan.
Taxes. Property taxes, plus state and local income taxes, offer sizable deductions for millions of households. You can also claim state or local sales taxes, but this is as an alternative (not in addition) to deducting income taxes.
Charitable gifts.You can list gifts to qualified charitable organizations as one of your itemized deductions on Schedule A. Hang onto documentation of each gift. And remember that if you receive a benefit because of your contribution, such as a mug or a symphony ticket, you can deduct only the amount that exceeds the fair market value of that benefit.
Medical and dental expenses. You can deduct medical expenses during the calendar year that exceeded 7.5 percent of your adjusted gross income. Apparently people have pushed the limit on this deduction sometimes, prompting the IRS to add some footnotes: "You may not deduct funeral or burial expenses, over-the-counter medicines, toothpaste, toiletries, cosmetics, a trip or program for the general improvement of your health, or most cosmetic surgery. You may not deduct amounts paid for nicotine gum and nicotine patches, which do not require a prescription."
Business deductions. Even if you don't run your own business, some work-related costs may be deductible. One example is the cost of necessary transport from one workplace (away from home) to another. If you run a business, a host of deductions are available, including travel expenses, business use of a car, and business use of your home.
Finally, remember that in addition to deductions you may qualify for tax credits, based on things like your income level or on events like adoption, that will further lower your tax bill.
All this may mean plowing through a lot of paperwork, but it brings a payback.