It is only natural for you to worry that you are missing some tax deductions when you compile your tax records at the end of each year. There are a number of reasons why you may feel this way. It might be the “I was talking to my neighbor and he got a $3,000 refund” reason. Or it might be the “I know I gave more to charities last year, but I cannot remember how much or to whom” reason. The point is, we are never really sure that we got the “best deal” when it comes to our income tax returns. Our tax system is subjective by nature and permits some taxpayers to get a “better deal” than others. The focus of this article is to help you identify deductions and credits which you may be missing.
Education tax credits are among the newest additions to our tax code. They represent great opportunities for taxpayers. The education tax credits come with phase out limits. This means that taxpayers with income above certain levels are phased out of taking advantage of these tax credits. If your income is below the phase out limit and either you, your spouse, or your children are taking college courses at an accredited college or university, then you may qualify for an education tax credit.
Credits are better than deductions because they offset your tax bill dollar for dollar. Deductions only offset income at a percentage which is referred to as your marginal income tax bracket. We do not have space in this article to describe the benefits under these new credits, so if you think you might qualify, give us a call and we will help you with the details.
Do not shortchange yourself on charitable contributions. Many of our tax clients will tell us that they know they gave money or property to charities throughout the year but did not keep receipts. Get into the habit of keeping those receipts. Every one hundred dollars of charitable contributions saves you upwards of $33 combined federal and state taxes.
Make sure that you include all of your medical expenses. It is very difficult to qualify for medical expense deductions since they must be in excess of 7.5% of your adjusted gross income. But, in a year in which you have large medical expenses, make sure that you keep track of all of your medical expenses, including prescription drugs, medical mileage, lodging while visiting family members in medical facilities, home improvements that have medical justification, and the costs of smoking cessation programs. The list goes on. Call us if you have heavy medical expenditures, and we will provide you with a complete list of deductible medical expenses.
Keep track of your investment-related and work-related expenses. Both of these types of expenditures are deductible. There is a 2% exclusion on this type of deduction so that the amount over 2% of your income is actually deductible. These expenses include: job searching, job-related education, job-related travel, computer (that you use for your employer’s benefit), or a home office (where you perform work-related duties).
For those of you who are self-employed, the situation becomes a lot more complex. There is an endless list of items that qualify as business expense deductions. Every eligible taxpayer should take full advantage of the automobile expense deduction. Every business mile you drive represents a 31 cent deduction. Multiply that by 10,000 miles a year and you are talking about $3,100 worth of deductible business expenses. Please keep a log of your business miles to substantiate your deduction. Incidentally, business use of your automobile applies to employees as well as self-employed persons.
Employees should find out if their employer offers a reimbursable expense plan. Having your employer reimburse you with money that is not included in your salary is by far the best way to handle this type of expense. Under this scenario, you are not taxed on the reimbursement; the employer can deduct the reimbursement as a business expense, and you do not have to try to qualify for miscellaneous deductions that exceed 2% of your income.
Our Tax Organizer is our primary tool for identifying deductions and credits which can save you tax dollars. It contains a comprehensive list of tax saving possibilities and questions about your situation which help us to minimize your tax liability. In addition, the organizer contains your previous year’s information, which can be quite helpful as you go through the painful process of assembling tax information each year.
We are placing increasing emphasis on using our tax organizer with all of our clients. We have found that it offers the best available assurance that we take full advantage of all tax savings possibilities.
As always, we encourage you to contact us regarding your questions. The summer is the perfect time to schedule a tax consultation to develop a checklist for reducing your income tax bill next April 15.