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The Top 10 Overlooked Tax Deductions
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.
- Pay off debt with a home equity loan rather
than credit cards.
- Contribute old clothes, furniture and other
items to charity.
- Bunch your deductions.
- Let the IRS subsidize your job search.
- Keep up with your investment expenses.
- Keep receipts on any business supplies or
business-related gifts you make.
- Tax planning advice is deductible.
- Remember that not only medical expenses, but
any special equipment or treatments you receive, are deductible.
- Deductible medical services don't have to be
performed by your doctor.
- Self-employed owners can deduct the costs of
hiring their children as workers.
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| 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. |
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| 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 28% bracket, a $1,000 contribution of old clothes means $280 in your
pocket. You wouldn't walk out of a store without your change, so don't forget your
receipt. |
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| 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. |
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| 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 (If you're driving, you can deduct
32.5 cents for travel.) and any other expenses related to your attempt to get a new job.
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. |
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| 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. |
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| 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. |
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| Tax planning advice is deductible. Tax-related professional fees are deductible. Tax preparation fees are
deductible. 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. |
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| Remember that not only medical expenses, but any special equipment or
treatments you receive, are deductible. For example, when a friends son, Josh, was born, he had a hip problem for
which his doctor prescribed swimming as an exercise. He could have joined a swim club and
deducted the expenses. Instead, he put a pool in his backyard. 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 use your car for
trips to the doctor, keep a record and deduct 10 cents a mile for tax purposes. Let's get
creative. It has been established that the cost of 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. |
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| 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. |
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| 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
2000, you can pay each child as much as $6,400 (each child gets a $4,400 standard
deduction plus $2,000 in an IRA), deduct the sum in full, and they pay zero taxes. If
you're in the 31% bracket and hire two minor children, you save $3,968 in taxes ($6,400 x
2 x .31). This technique has been allowed for children as young as seven years old. 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 $1,958.40 ($6,400
x 2 x .153). |
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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. Please contact us or seek advise
from a professional tax advisor to ensure you take full and proper advantage of these and
other tax savings methods. |
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