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Top Ten Deductions - Express Income Tax

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 carefully before you file.

Don't overlook any of these personal tax deductions--they make itemizing your deductions well worth it.

Mortgage Interest and Property Taxes
You can deduct the mortgage interest (not the principal) that you pay on a loan secured by your primary residence or a second home. To claim the deduction, you must be obligated to pay the debt and you must actually make the payments.

You can also deduct any taxes you pay on real estate you own that is not used for business. If you have a mortgage on the property, the annual mortgage statement (Form 1098) you receive from the bank should include both the amount you paid in real estate taxes for the year and the interest and points you paid for the year (your mortgage interest deduction).

Charitable Donations 
You can deduct any cash or noncash contributions you make to a qualified nonprofit organization. While you are supposed to save receipts for any contribution, deductions for noncash contributions under $250 are rarely questioned.

For noncash contributions over $250, you must have a receipt or acknowledgement from the nonprofit organization. For noncash contributions over $500, you have to file an extra form with your tax return, Form 8283, Noncash Charitable Contributions.

Medical Expenses and Health Savings Accounts
You can deduct the amount of your medical and dental expenses that exceeds 7.5% of your adjusted gross income. Eligible expenses include both health insurance premiums and out-of-pocket expenses not covered by insurance for both you and your dependents. Unless your medical expenses are substantial, however, your medical expenses will probably fit within the 7.5% limitation, meaning you won't be able to deduct anything.

If you have a qualified Health Savings Account (HSA), you can deduct your contributions to the account, and you don’t have to pay tax on any interest you earn from the account. To establish an HSA account, you must have a high-deductible health plan that qualifies under the HSA rules. You can use money in your HSA account to pay almost any kind of health-related expense.

Child and Dependent Care 
A credit for the costs of care for a qualifying individual to allow you to work or look for work. The dollar limit on the amount of the expenses you can use to figure the credit is $3,000 for the care of one qualifying individual or $6,000 for two or more qualifying individuals. The amount of your credit is between 20 and 35 percent of your allowable expenses. The percentage you use depends on the amount of your adjusted gross income.

The limit is $3,000 of the expenses paid in a year for one person, or $6,000 for two or more. You must reduce these dollar limits by the amount of any dependent care benefits provided by your employer that you exclude from your income.

State and Local Taxes 
Under the American Jobs Creation Act of 2004, taxpayers have been given a choice when it comes to deducting state and local taxes. For the tax year 2005, you can choose to deduct either your state and local income taxes or your state and local general sales and use taxes, but not both. You can decide whether it’s more beneficial to deduct your income tax or your sales tax.

This is good news for taxpayers who live in states with no (or a low) state income tax like Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. In 2006, taxpayers will no longer have the choice to deduct state and local general sales taxes, unless pending legislation extends this option to future years.

IRA and 401(k) Contributions 
If your employer offers a 401(k), it pays to maximize your contributions, especially if your employer matches them. For the 2006 tax year, the maximum contribution increased to $15,000. If you are 50 or older, you can contribute an extra $5,000.

For IRAs, you can contribute $4,000 in 2006, and deduct that amount from your income. If you are 50 or older, you can contribute an extra $1,000.

Student Loan Interest 
You may be able to deduct interest you pay on a qualified student loan. Generally, the amount you may deduct is the lesser of $2,500 or the amount of interest you actually paid. It is subject to a phaseout, which means the amount of the deduction gradually decreases and phases out completely if and when your modified adjusted gross income (MAGI) amount reaches the annual limit.

Education Credits--AOTC and LLC 
An education credit helps with the cost of higher education by reducing the amount of tax owed on your tax return. If the credit reduces your tax to less than zero, you may get a refund. There are two education credits available: the American opportunity tax credit and the lifetime learning credit.

In addition, you can now contribute up to $2,000 to a Coverdell education savings account (formerly called an education IRA) each year. (The amount isn't deductible, but distributions from the account for payment of tuition are tax-free.)

Job Expenses 
You can deduct education and training costs for your job if your employer doesn't reimburse you for them (and if the education is for your current job, not to get a better job later). Job-hunting expenses, including mileage, are also deductible. If you're a teacher, don't forget to include teaching-related expenses for a small tax break.

Home Office Tax Deduction 
For taxable years starting on, or after, January 1, 2013 (filed beginning in 2014), you now have a simpler option for computing the business use of your home (IRS Revenue Procedure 2013-13, January 15, 2013). The standard method has some calculation, allocation, and substantiation requirements that are complex and burdensome for small business owners. This new simplified option can significantly reduce recordkeeping burden by allowing a qualified taxpayer to multiply a prescribed rate by the allowable square footage of the office in lieu of determining actual expenses.


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