Being smart about your taxes involves deciding early how you are going to minimize your tax liability. Much of this is deciding which deductions will reduce your taxable income.
Medical Expenses
Medical costs are one of the tax deductions you can itemize. However, many people ignore this deduction since the total medical expenses have to be a minimum of 7.5% of their adjusted gross income. There are many ways, other than the obvious, that you can contribute to this deduction and perhaps reach the minimum threshold. For example, insurance payments made from post-tax income can be included. Also, items like eyeglasses and contact lenses that aren’t covered by insurance can contribute to your medical deductions.
In certain tax brackets, for relatively healthy individuals, it’s very difficult to make this write-off work. If your employer offers a medical savings account, take advantage of it.
State and Local Taxes
If your state requires you to pay income tax, the amount you pay can be used as a deduction. Other taxes can be deducted as well. Taxes you pay on personal property, investments, real estate, and some disability can be deducted too. In addition, sales tax paid can be written-off.
Mortgage Interest
Are you paying on a home loan? The mortgage interest that you pay on your loan can be deducted. In addition to your primary home, if you have a second home that you use for personal reasons, you can deduct interest paid on that mortgage as well. For new loans, points – money paid to the lender to obtain the loan – can be deducted, even if the seller paid the points. If you take the points deduction, make sure you have paperwork supporting the deduction.
Charitable Contributions
You probably already know that you can deduct the amount of any contributions that you made to a charitable organization. This includes donations made in cash as well as goods that are donated. Did you realize that there are some non-cash contributions that you can deduct as well? If you drove your personal car to do volunteer work, then you can take the standard mileage rate deduction of 14 cents per mile. You can also deduct the cost and upkeep for any uniform required for your volunteer work. Remember, if your contribution was over $250, you need a written statement from the organization.
Educational Expenses
If you paid educational expenses related to your work, you can use this as a deduction. The education must be used to maintain or improve the skills required in your current job or is required to keep your current job, salary, or status. The limit for educational expense deduction is 2% of your gross income.
Tax laws change regularly. If you aren’t sure about a deduction, consult an accountant.
Tightening your belt in a tough economy
