March 27, 2009 in Taxes

Getting the most from itemized deductions

Smart taxpayers know deductions can cut a tax bill.

Smarter taxpayers develop their deductions strategy early, getting the most out of the tax breaks and avoiding filing-deadline panic.

Figuring out which deductions can help you is important because they aren’t dollar-for-dollar tax-reduction tools. They can only cut your taxes on a limited basis by reducing your taxable income. Less income equals less tax.

That means every bit that reduces your taxable income is critical to cutting your final payment to Uncle Sam — or getting a bigger refund. If you’re going to add up your deductible expenses, add them all up on your Schedule A, especially because many deductions require you to reach a certain level before you can use them.

Tax-savvy filers know that some useful deductions get overlooked in the last-minute rush to find ways to cut a tax bill. So now, with plenty of time to spare, here are some itemized deductions you may have forgotten about.

Many medical costs to consider

There is never anything good about being sick, but don’t add to your ailments by overlooking medical costs you can deduct.

Because total medical expenditures must be at least 7.5 percent of adjusted gross income, many taxpayers don’t even bother with this one. But there are ways the Internal Revenue Service says you can get this deduction up to that ceiling.

Medical costs to consider
  • Count travel expenses to and from medical treatments. The IRS adjusts standard mileage rates each year, usually in the fall. But because of high gasoline prices last summer, the IRS increased the rates sooner, meaning that for 2008 returns there are two rates to consider. The rate for medical miles driven between Jan. 1, 2008, and June 30, 2008, is 19 cents per mile; for miles driven between July 1, 2008, and Dec. 31, 2008, it is 27 cents per mile. It is 24 cents per mile for allowable medical travel in 2009.
  • If you made insurance payments from already-taxed income, add it in here. This includes the cost of long-term care insurance, up to certain limits based on your age.
  • What about things your insurance didn’t cover, but you needed anyway? This is where you can recoup some of their costs. This includes an extra pair of eyeglasses or set of contact lenses, false teeth, hearing aids and artificial limbs.
  • The doctor told you to get that humidifier to help relieve your chronic breathing problems. That means the device — and additional electricity costs to operate it — could be, at least partially, deductible.
  • The IRS also has deemed that costs for programs to help you kick the smoking habit are medically deductible, as are weight-loss programs undertaken at a physician’s direction to treat an existing ailment such as heart disease.

Special medical needs

Do you have special needs? The medical-deductions section of your tax form is also where you account for the cost of a wheelchair, crutches and equipment that enables a deaf person to use the telephone or that provides television closed-captioning.

If you purchase a guide dog, Fido’s cost is deductible, too.

Even some home remodeling might be just the prescription for a tax break, as long as you follow your doctor’s orders and the IRS’ rules. If you need, for example, to add a chair lift to get up and down the stairs, this generally is considered a legitimate expense. Here are a host of other deductible projects that make a house more accessible for a handicapped resident or individual with chronic medical problems.

Deductible projects
  • Adding ramps.
  • Widening doors and hallways.
  • Lowering counters and cabinets.
  • Adjusting electrical outlets and fixtures.
  • Installing railings, support bars and other bathroom modifications.
  • Changing hardware on doors.
  • Grading exterior landscape to ease access to the house.

A word of warning, however: Elevators generally aren’t deductible. The IRS considers this a structural change that could increase the value of your house and therefore doesn’t allow it as a medical deduction.

Yes, there are some good taxes

Some taxes really do come in handy.

If you live in a state with an income tax, you already know the value of deducting those taxes from your federal ones. But don’t limit yourself here.

You also can deduct personal property taxes, intangible taxes on investments, real estate taxes and, in some cases, the disability taxes you pay.

Go a bit further down the governmental tax chain, too. Did you pay city or county income or property taxes? Then throw them in there.

This means those taxes you paid directly, not just the ones withheld from your paycheck and that show up on your W-2.

On 2008 returns, taxpayers who itemize still get the chance to deduct state and local sales taxes they paid. If you live in a state that collects both sales and income taxes, you’ll have to choose which tax amount you want to deduct on your Schedule A.

Residents of states that don’t collect income tax but do levy sales taxes will find this is a great break. But it’s worth checking out even if you do pay state income taxes. If your income tax is low, and you made a lot of expensive purchases during the year, the sales tax deduction might cut your IRS bill more than your income tax write-off.

An interest(ing) deduction

Every homeowner makes sure he gets that statement from the mortgage holder so that chunk of loan interest can be deducted.

But don’t forget that second home or a vacation place with a mortgage. If it meets IRS guidelines for personal use during the tax year, then be sure to include interest paid on that property’s loan on your Schedule A, too.

If it’s a new loan, make sure you add in here any points — money you paid the lender to get the loan. Even if the seller paid the points, you, the buyer, can write them off on your return. If you don’t get a statement from your bank with information on points you paid, pull out your closing paperwork and you’ll find it listed there.

Investments can help you out here, too. Did you borrow money to buy that hot stock? Interest on that loan is deductible.

Countless charitable contributions

You got the receipt from the Red Cross for your cash donation. You have that one from the Salvation Army for that extra couch you got tired of seeing in the garage.

You’re done here, right? Wrong.

There are many noncash contributions that taxpayers forget to add up.

The IRS allows you to deduct the miles you drove your personal car to the soup kitchen where you volunteer each weekend. The standard mileage rate for travel done to help out a charitable organization is 14 cents per mile.

Are you a Boy Scout or Girl Scout leader? Then the cost of your uniform and its upkeep — dry cleaning, tailoring, repair — is deductible.

Letting the IRS share your losses

Most taxpayers think they can deduct casualty losses only if they are victims of a catastrophic natural disaster.

But you don’t have to suffer through a fire, flood, hurricane, tornado or earthquake to claim a casualty deduction. Losses from theft and vandalism are eligible losses, as are any damages from an automobile accident as long as it wasn’t the result of driver negligence.

The IRS does limit, however, just how much of these losses you can use to reduce your taxable income. Any amount here must be reduced by $100, and then it must exceed 10 percent of your adjusted gross income.

Myriad miscellaneous expenses

This is a fun category if you’ve got the patience — and receipts — to back up your spending. And you’ll need the receipts because this category, like the medical one, is limited. The total of your miscellaneous deductions must be more than 2 percent of your adjusted gross income.

If you looked for a new job this year, be sure to count your job-hunting expenses here. Just remember that your job search has to be in the same field in which you’re already employed. Any subscriptions to work-related publications also can be taken here, as can fees you paid for membership in a professional organization, as long as you weren’t reimbursed by your employer.

Do you have a hobby that nets you a bit of extra spending money throughout the year? Any costs you had toward that hobby can be totaled up as a miscellaneous expense. But you can’t deduct more than you made on the hobby. (To collect a few more tax breaks, maybe you should consider turning your hobby into a business.)

Maybe your hobby is a bit more glitzy — trips to Las Vegas or Atlantic City, N.J., for a little recreational gambling. If it wasn’t a good year at the roulette wheel, the IRS lets you deduct your losses. These losses aren’t limited by the 2-percent cap, but you can’t deduct in losses more than you won.

And finally, if this whole deduction process just got too taxing for you and you paid an accountant to figure it out for you, here’s a final itemizing gift from the IRS. Fees paid to professional tax preparers are deductible, too.