Tax Tips

January 2005

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 year-end panic.

Figuring out which deductions can help you is important because they aren't a dollar-for-dollar tax reduction tool. 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. Especially since 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 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 hat you can deduct.

Since 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.

• Don't overlook travel expenses to and from medical treatments. Check the agency's Web site for current mileage rates.
• 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 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 disease 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 hearing or seeing-eye 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 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. Other deductible projects that make a house more accessible for a handicapped resident or individual with chronic medical problems are:

• 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 government tax chain, too. Did you pay city or county income or property taxes? Then throw them in here.

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

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. Make sure to include that interest 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. If you don't get a statement from your bank with this information, 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 non-cash 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. Again, check the agency's Web site for current mileage rates.

Are you a 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 suffer catastrophic damages.

But you don't have to live through a fire, flood, hurricane, tornado or earthquake to file 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 can be taken here, as can fees you paid for membership in a professional organization.

Do you have a hobby that nets you a bit of extra spending money throughout the year? Any costs you had here toward that hobby can be toted up as a miscellaneous expense. But you can't deduct more than you made on the hobby.

Maybe your hobby is a bit more glitzy -- trips to Las Vegas or Atlantic City for a little recreational gaming. 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 final itemizing gift from the IRS. Fees paid to professional tax preparers are deductible, too.