How To Take Federal Income Tax Deductions

There is probably no area that causes more confusion among taxpayers than itemized deductions. You may have an unexpected financial event or change in circumstances, and the next thing you know your lawyer/employer/neighbor/ cousin Vinnie is telling you "Don't worry about it; you can take it off your taxes!" Really? How? Good questions.

In order to see if you really can or even should, keep in mind the following:

1. There are two ways to take deductions. There is the standard deduction, which is based on your filing status and is a set dollar amount that increases annually, and itemized deductions, the amounts spent on certain types of expenses totaled up. Both are subtracted from your income. It is both legal and smart to use whichever number benefits you the most.

2. To figure your standard deduction,you need to determine your filing status. These are: Single, married filing jointly, married filing separately, head of household, or qualifying widow or widower. If you are not sure what your filing status is, go to IRS Part 1, Section 2 to figure it out. Then go to Part 5, Section 20 to get the dollar amount of your standard deduction. Keep in mind that these amounts increase every year, so always check the IRS website or your current tax forms.
3. To figure your itemized deductions, you will need to add up what you paid or had withheld from your paychecks in the following areas:
   • Medical: Health insurance, long term care insurance, copayments for doctors, dentists, eye doctors, etc.; fees for physical therapy, medical equipment, doctor recommended weight loss programs, and certain alternative therapies; payment for prescription drugs, eyeglasses, contact lenses, and orthodontia; and mileage to and from doctors and pharmacies. These are the most common medical expenses. Keep in mind that any insurance premiums that come out of your paycheck on a "pre-tax" basis cannot be deducted again. Since this is an area that is subject to certain limitations, be sure to follow the instructions on Schedule A carefully to be sure you are not deducting more than is allowed.
     
     
   • State and local taxes you have paid: This includes state income tax withheld from your paycheck, state unemployment or disability tax, real estate taxes, personal property taxes, and prior year back taxes or balance due paid in the current tax year.
     
     Note: If you pay your real estate taxes to your mortgage lender monthly along with your mortgage payment, the amount paid for the year will appear on your mortgage interest statement. If you pay them yourself, you will need to keep track of the amount.
   • Mortgage interest: Interest paid on mortgage loans for first or second homes. This also includes home equity loans. If you have refinanced during the year with a different lender, make sure you add both amounts. If you got the mortgage or refinanced during the year, make sure you include any points paid. Lenders typically issue a form 1098 for all interest received during the year. If you have a private mortgage, you will need to provide the name, address, and federal identification number of the lender, as well as the amount. Commercial lenders include this information on the 1098.
   • Charitable contribution: Charitable contributions fall into two categories. The first is contributions by cash or check. This would include weekly amounts given to any church, temple, or mosque you attend, as well as any one time or irregular amounts given to a registered U. S. charity. Don't forget donations by cash made at the grocery store or another retailer and just added to your bill. Ditto the Salvation Army Santa, the kids collecting for UNICEF, or the animal shelter set up at the pet food store. If you cannot get a receipt, make a note of the amount. A few dollars here and there every other week add up by the end of the year.

     The second category is gifts other than by cash or check, and for most people this is the annual closet clean out and drop at Goodwill or a similar organization. Make a list of the clothes, toys, sports equipment, and household goods that you give to one of these organizations. You are allowed to deduct the resale value, not what you paid. Most large charities that accept these donations can give you a value guide.

   • Job expenses and other miscellaneous deductions: This is also an area subject to limitations, so again read the instructions carefully. This section would include unreimbursed employee business expenses, such as union dues, work boots, safety goggles, work gloves, uniforms or uniform cleaning, fees for licenses and certifications, reference materials, and other items required to do your job that your employer does not pay for. In this area you may also deduct tax preparation fees, the cost of safe deposit box rentals, and certain investment related expenses. The big area for most people, though, is job related.
   • Other possible deductions: There are deductions available for casualty and theft losses (such as fire, flood, or other disaster) and a few other areas, such as gambling losses. But remember, you can only write off what you've lost on those lottery tickets up to the extent that you have won. So if you have won $600, but lost $2000, you only get to deduct $600. These deductions do not affect most people, and they may require a special form. If you think one of these situations applies to you, contact a tax professional or the IRS for advice on how to proceed.

Remember, there is nothing wrong with taking a legitimate deduction. Don't decide how to do your tax return based on fear of audits, a desire to save time, or the desire to save money. Keep good records using whatever method (from shoebox to spreadsheet) that works for you. When in doubt, check with the IRS or a trained tax professional, and learn to keep as much of your money as you are legally entitled to.