3. Complete charitable contributionsDid you give to charitable groups last year? All types of donations, from cash to cars, could be valuable tax deductions, so make sure you count them all when you file. Be sure to follow the donation tax rules, the most important being that you give to a qualified organization -- that is, one that has tax-exempt status with the IRS. Also be careful when calculating any gifts of clothing and household items. Tax law now requires that these donations be in good or better condition or the deduction is disallowed.
4. Deducting private mortgage insuranceHomebuyers who don't come up with a down payment of at least 20 percent typically must purchase private mortgage insurance, or PMI, when they get a home loan. Although the buyer pays for PMI as part of the monthly mortgage payment, the policy protects the lender in case of default. Usually, this added expense is, in most cases, simply part of the price of owning a home.
But beginning in 2007, some homeowners could claim a tax deduction for PMI premiums, and a new law extends the deduction to certain premiums paid in 2008 through 2010. There are specific eligibility guidelines, the most critical being that your home loan that includes PMI was taken out on or after Jan. 1, 2007. PMI payments on loans issued in prior years remain nondeductible. Also, when your adjusted gross income, or AGI, reaches more than $50,000 as a single filer or $100,000 for a married couple filing a joint return, your PMI deduction begins phasing out.
But if you and your mortgage do meet the PMI deduction eligibility rules, be sure to claim this new tax break on Schedule A.
5. Overlooking unearned incomeBecause your Social Security number exists on bank and investment accounts, the IRS knows precisely how much unearned income you made as soon as you did, thanks to the 1099 forms that financial institutions send to the tax agency. If you forget to include this info on your return, the IRS examiners will let you know that you owe taxes on it, too. And depending on when your oversight is discovered, you also could owe penalties and interest on the unreported earnings.
In fact, the 1099-INT form, which tells you and the IRS how much interest an account earned, has two boxes with specifics on these earnings. Box 8 includes various tax-exempt interest payments. Box 9 reports how much of that tax-exempt interest is subject to the alternative minimum tax, or AMT. Pay close attention to this amount if you're subject to the AMT.
Also, be careful in figuring any tax due on your investment earnings. Some dividends, reported to you and the IRS on Form 1099-DIV, are eligible for lower capital gains tax rates. These amounts are in box 1b (qualified dividends) of that form. You'll have to do some additional work to compute this tax amount, especially if you're filing your returns without the help of a tax software program, but it's worth the effort to shave some dollars off your eventual tax bill.
6. Math miscalculationsThe most common error on tax returns, year after year, is bad math. Mistakes in arithmetic or in transferring figures from one schedule to another will get you an immediate correction notice. Math mistakes also can reduce your tax refund or result in you owing more tax than you thought.
Using a tax software program to file your return can help reduce math errors. The built-in calculators do the work for you, adding, subtracting and inserting numbers on additional forms as needed. But you still have to make sure that your initial numbers are correct. Entering $3,500 when the real figure is $5,300 makes a lot of tax difference. Getting the numbers right is crucial because you can be sure that the IRS will be double-checking numerical entries against its copies of your tax statements (W-2, 1099s and the like). When IRS examiners find a discrepancy, they'll definitely let you know and, in many cases, will correct your mistake and refigure your taxes for you. Don't give them the chance. Make sure your math entries are right.