Prepare
Taxes
Go to Step by
Step
A R T I C L E S
How to determine your
filing status
Tips on using your PC to prepare an error-free
return
Unlucky 7: the top taxpayer mistakes
The top 10 overlooked deductions
How many exemptions can you take?
Tax strategies certain to attract an
auditor
How to avoid an audit
What if you can't pay the IRS?
What to do when the IRS comes knocking
Make a mistake? Make amends with 1040X
R E L A T E D
A R T I C L E
S
How to file an
extension
What to do when the IRS
comes knocking
|
| Advertisement |
 | | The Basics
The top 10 overlooked deductions
Each year, thousands
pay too much in taxes because they didn’t think of deducting
job-hunting expenses or donations to charity. Read this list before
you file.
By Jeff
Schnepper
We all make
mistakes, and, more often than not, the mistakes are acts of
omission as opposed to commission. In other words, we miss the
little things and they add up. It doesn’t make any difference if
you’re talking about scuba diving (a favorite activity of my family)
or taxes. So take a little time to compare this list against all
your activities of last year. You’ll probably find some things that
can save you money -- if not this year, then next.
1. Pay off debt with a
home equity loan rather than credit cards.
Personal interest is not deductible. Credit card
interest, at rates ranging from 18% to 21%, is usually personal
interest (unless it's used for business or investment purposes). You
can't deduct it.
Pay off any credit card debt with a home equity
loan or through a home equity credit line. The interest on that loan
is deductible. Home equity debt is any debt secured by your house.
The money can be used to pay off your credit card debt, for
vacations, or anything else you want. The interest on up to $100,000
of debt is deductible as home equity interest.
In addition to home equity interest, you can
deduct the interest paid on debt to acquire or purchase your
house.
By shifting from credit
card debt to home equity debt, you not only convert nondeductible
interest into interest or expenses you can write off, but you'll
probably pay a much lower interest rate.
2. Contribute old clothes, furniture and other
items to charity.
Everybody
knows that if you contribute cash to a charity, you get a deduction.
You can also deduct the wholesale fair market value of non-cash
contributions to your church, synagogue, Goodwill or any other
qualified charitable organization. You can also deduct your mileage
-- at a rate of 14 cents a mile -- if you use your car for
charitable purposes.
Make sure
you get a receipt. The receipt usually will say something like three
bags of clothes, without any value given. But don't leave without
it. Think of that receipt as green paper with pictures of dead
presidents. If you're in the 27% bracket in 2002 and 2003 (down from
27.5% in 2001), a $1,000 contribution of old clothes means $270 in
your pocket. You wouldn't walk out of a store without your change,
so don't forget your receipt.
3. Bunch your deductions
Many deductions, such as medical expenses (see
discussion below) and miscellaneous deductions, require you to
overcome a “floor” or minimum. In the case of miscellaneous
deductions, only those expenses that exceed 2% of your adjusted
gross income can be deducted. For medical deductions, it's 7.5%.
This offers some potential strategy to get the best bang for your
deduction dollars.
It's
called “bunching your deductions.” That means if you know you're
going to spend a large amount on medical bills this year, look to
see if there are others you can take now rather than waiting until
next year. If your daughter needs orthodontia work, do it in the
year where you know you can get the deduction. Otherwise, you'll be
buying those braces with no empathy or sympathy from Uncle
Sam.
4. Let the IRS
subsidize your job search.
Job-hunting expenses are deductible. If you're out
of work, or even if you're still employed but looking for a new job,
all of your job hunting expenses are deductible as miscellaneous
itemized deductions. Such expenses would include resumes, phone
calls, postage, travel costs and any other expenses related to your
attempt to get a new job. If you’ve done a lot of driving in your
job search in 2002, you can deduct mileage for your 2002 return at a
rate of 36.5 cents a mile. For 2003, the mileage rate falls to 36
cents a mile.
Creativity here
can be rewarding. For example, if you take a friend to lunch in an
attempt to use him as a reference or referral, you can use the cost
of the lunch as a job-hunting expense.
5. Keep up with your investment
expenses.
Investment expenses
also are allowed as miscellaneous deductions. Such expenses would
include investment publications, payment for investment advice,
calls to your broker and any other expenses related to the
production of investment income.
Rather than buy your investment newspapers and
magazines at the newsstand, subscribe to them and use your check as
the receipt. If you use your computer for investment purposes (more
than just tracking a few stocks), or subscribe to an Internet
service for investment purposes, those expenses also become
deductible.
6. Keep
receipts on any business supplies or business-related gifts you
make.
Pens, paper, a
calculator, special tools, a computer and even a briefcase used in
business are deductible. If your job requires you to travel, a
business suitcase would also be deductible. The key here is to
relate the item to your business. For example, as a writer, my
computer and the cost of Internet access are deductible because I
use them in my business.
The
key here is that you use the items in the business, not that you
necessarily need them. So long as the items are reasonable and
appropriate to use in your business, they don't have to be
absolutely “needed.”
If
there's any doubt, have your employer write a letter saying that
such items are required for your position and attach that letter to
your tax return. If you're audited, the IRS may ask for such a
letter. The best way to win an audit is to avoid
it.
7. Tax planning advice
is deductible.
As an attorney,
my tax-related professional fees are deductible. As an accountant,
my tax preparation fees are deductible. As an author, expenses
related to my books and other tax writings are deductible. If you're
self-employed, tax preparation fees can be deducted as business
expenses, potentially not only reducing your income tax but your
Social Security and Medicare taxes as well.
8. Remember that not only medical expenses, but
any special equipment or treatments you receive are
deductible.
When my son, Josh,
was born, he had a hip problem for which his doctor prescribed
swimming as an exercise. I could have joined a swim club and
deducted the expenses. Instead, I put a pool in my back yard. Let's
assume the pool cost $25,000, but it only increased the value of my
property by $15,000. The other $10,000 was deductible as a medical
expense.
Capital expenditures
are deductible to the extent their cost exceeds the added value to
your property. If you have arthritis or any other medical condition
that can be helped by a sauna or a whirlpool, those items are
deductible. Upkeep for these items would also qualify as deductible
medical expenses.
If you used
your car for trips to the doctor, I hope you kept a record. You can
deduct the mileage as a medical expense. In 2002, the mileage rate
is 13 cents a mile, up from 12 cents a mile in 2001. It drops to 12
cents a mile in 2003. Let's get creative. It has been established
that significant dental work is less expensive in Europe than in the
United States. Therefore, even with adding the transportation cost,
you could pay less for expensive dental work overseas than here
domestically. On that basis, the courts have ruled that such
transportation costs are allowable as medical
deductions.
9. Deductible
medical services don't have to be performed by your
doctor.
If you have a
condition like a bad back and your doctor says you need a daily
massage or other type of treatment, it can come from someone other
than a licensed physician. The service costs are deductible, but I
would strongly advise that you get a written note from your doctor
saying you need those services as proof for the
IRS.
10. Self-employed
owners can deduct the costs of hiring their children as
workers.
Hire your children.
You're giving them money anyway. If your business is unincorporated
and they're under 18, you won't be liable for any Social Security or
Medicare taxes. Moreover, for 2002, you can pay each child as much
as $7,700 (each child gets a $4,700 standard deduction plus $3,000
in an IRA), deduct the sum in full, and they pay zero taxes. (For
2001, the standard deduction was $4,550 and the IRA deduction
$2,000, bringing the total to $6,550.) If you're in the 30% bracket
in 2002 and hire two minor children, you save $4,620 in taxes
($4,700 x 2 x .30). This technique has been allowed for children as
young as 7 years old. (In 2001, the savings were
$4,061.)
Not only does this
technique save income taxes, it reduces your liability for Social
Security and Medicare taxes on your net income. This could save you
an additional $2,356.20 ($7,700 x 2 x .153). The savings were
$2004.30 in 2001.
Some of the
above techniques are aggressive, but all of them are legal -- backed
up with court cases, revenue rulings and the like. If they're
appropriate for you, use them. Otherwise, you're making a
nondeductible contribution to the IRS.
(Editor’s note: We
expected and got sizable changes to the tax code in 2001. We expect
attempts at least to change the code more in 2002. So, stay in touch
with MSN Money for the latest updates.)
|
