Itemize tax deductions to save money
Most taxpayers will choose the standard deduction -- about two out of three taxpayers make this choice. It's quick, it's easy, and it allows taxpayers to file what's referred to as a short form, the form 1040-EZ. You may not file a form 1040-EZ if you itemize.
To itemize, you must file a Schedule A. If your total deductions on Schedule A exceed the standard deduction for your filing status, you can claim that amount as your "itemized deductions."
Homeowners tend to itemize more than other taxpayers. This is because the combination of the home mortgage interest deduction and real estate taxes tend to tip total deductions over the standard deduction amount.
There are, of course, additional expenses which may be deducted on a Schedule A. They include:
Medical and dental expenses. Medical and dental expenses are deductible, but only to the extent that they exceed 7.5% of your adjusted gross income (AGI). This is sometimes referred to as a "floor." Here's how it works: Let's say your medical expenses for the year total $4,000, and your AGI is $20,000. You can deduct $2,500 of medical expenses on your Schedule A -- that's the overage of your total expenses. Here's the math: $4,000 of expenses less $1,500 (7.5% of your AGI of $20,000) = $2,500.
If you do not meet the "floor," you may not deduct the expenses. Using the prior example, let's again say that your medical expenses for the year total $4,000, but this time, your AGI is $100,000. You may not claim any medical expenses on your Schedule A since you didn't meet the floor. Here's the math: $4,000 of expenses less $7,500 (7.5% of your AGI of $100,000) = -$2,500.
You can find a list of deductible (as well as what's not deductible) medical expenses.
Taxes you have paid. For 2009, you can elect to deduct the total of state and local sales taxes or state and local income taxes on Schedule A. You cannot deduct both.
In addition to real estate taxes, you can also deduct personal property taxes if you live in a state that requires you to pay them. To be deductible, personal property taxes must be based on value of the item and imposed on an annual basis.
You may not deduct federal income taxes paid, FICA (Social Security and Medicare taxes), federal unemployment taxes, customs duties, or federal estate and gift taxes. Similarly, license fees for the privilege of owning a car or a pet are not deductible.
Charitable gifts. Charitable donations are an excellent way to reduce your tax burden for the year, while doing something good at the same time. But to properly claim a deduction, you'll need to follow the rules.
Cash deductions, regardless of the amount, must be substantiated by a bank record (such as a canceled check or credit card receipt) or in writing from the organization. The writing must include the date, the amount and the organization that received the donation.
For donations of non-cash items, you can generally take a deduction for the fair market value of the items -- what the item would sell for in its current condition. Non-cash items must be in "good" condition or better, or the contribution is disallowed. There is an exception to the rule: If the item is valued over $500 but not in "good" condition, you may still take the deduction if you have an appraisal for the item. Special rules apply to appreciated goods like stock or jewelry, or hard to value items such as artwork.
To substantiate your non-cash donation, you need to obtain a receipt from the charitable organization with the name of the charity, the date of the gift, the location of the charity, and a detailed description of the property donated. If the non-cash donation is worth more than $250, the reporting requirements increase. Check out IRS Publication 526 for more details.
Casualty and theft losses. You can deduct some part of a casualty loss from the damage or loss of your property from any unexpected or unusual event such as a flood, hurricane, tornado, fire or earthquake. Similarly, you can recover part of a theft loss if the taking was illegal under the law of the state where it occurred. See IRS Publication 584 for more details.
Job expenses. You can deduct the costs of unreimbursed expenses paid during the year for the purpose of being an employee and are considered "ordinary and necessary" in your line of work. This would include dues and fees necessary to keep your license or certification, tools and supplies used in your work, subscriptions to professional journals and the cost of a uniform (but only if you can't wear the uniform outside of work hours). For a more extensive list, check out IRS Publication 529.
Even better in this market? You can deduct the cost of reasonable job search expenses, including the costs of sending resumes and going on interviews.
There's one drawback: Expenses that are job-related are subject to a 2% floor. That means, similar to health care expenses, you have to meet a certain minimum before you can take any deductions. Assuming your AGI is $25,000, you would have to report expenses of more than $500 (2% of $25,000) before any part of your expenses are deductible -- and then you can only deduct the overage. So, using AGI of $25,000 as an example, if your expenses totaled $800, you could deduct $300: $800 worth of expenses less $500 ($25,000 AGI x 2%) = $300.
Other miscellaneous deductions are generally subject to the same 2% floor (there are a few exceptions). Those would include safe deposit box fees and investment fees tax preparation fees, including the cost of a tax preparation software or hiring a paid preparer. You'll find a more extensive list in the IRS Publication 529.
Deductible expenses can add up, but they need to be more than the standard deduction in order for it to make sense to itemize. Keep all your documentation together, and at tax time, have your tax preparer (or software package) run both scenarios and see which one benefits you the most.