How many times have you done your taxes and, three weeks later, learned you had missed the opportunity for a deduction? Too many, I’m sure. How can you not miss these deductions the next time? Start planning now.
I’ve found a number of deductions my clients commonly miss.
By Jeff Schnepper
Here are 10 potential deductions that can affect your tax bill for 2009 and your tax planning for 2010.
Charity, as I hope everyone remembers, begins with a tax deduction. If you didn’t have the cash to contribute in 2009, I hope you charged it. And, likewise, if you don’t have the cash when it comes time to contribute in 2010, go ahead and charge it. The deduction is allowed in the year of the charge, not when you actually pay the bill.
Get a receipt from the charity to which you made a donation, and, if you’re still worried about documentation, get the credit card company to send you their record of the transaction.
Now, let’s say you emptied your closets and gave everything to Goodwill or a similar charity. The value of your donated items — clothes, furniture, whatever — is deductible. Get a written receipt. With noncash charitable contributions, the rule is simple: No receipt means no deduction if you get audited. Clothes and household goods must be in good or better condition to get the deduction.
If you’ve already dumped your old clothes in a Salvation Army box and walked away without a receipt, take the deduction anyway. You’ve legitimately made the contribution. You just may not be able to prove it in an audit. Starting with 2007 returns, the law has required a receipt or some sort of written confirmation for all charitable donations. Feel lucky? Play the audit lottery. You’re still an honest person.
If you can, reconstruct as much as you can the list of items you donated and then figure out their market value. The easiest way is to go to a thrift store and check prices there. The Salvation Army also has value guides for donated items on its regional Web sites. (I have a valuation guideline schedule on page 257 of the 2010 edition of my book “How to Pay Zero Taxes.” Borrow it from the library if you don’t want to buy it.)
And, of course, when you make your next donation, get that receipt.
New points on refinancing
With interest rates remaining so low over the past few years — even in 2009 and definitely in 2010 — lots of homes have been refinanced, sometimes more than once.
Any points you pay to refinance your home can be deducted on a monthly basis over the life of the new loan. So if you refinanced your mortgage on June 1, 2009, for a 20-year term, seven out of 240 months will have passed after Dec. 31, 2009. If you paid $2,400 in points, you can write off $70 ($10 a month for seven months) for 2009. You can write off $120 for 2010 and each year thereafter until the points have been deducted in full. The amount may not be huge, but every little bit helps.
Old points on refinancing
This is one deduction lots of people miss. All unamortized points on an old refinancing are deducted in the year of a new refinancing.
So let’s say you refinanced on June 1, 2008, and paid $2,400 in points. You refinanced again on June 1, 2009. You can deduct all the remaining points on the 2008 loan on your 2009 return. That’s $2,280 plus the $50 you could deduct for January through May 2009. Likewise, if you refinance the 2009 loan in 2010 (if interest rates stay low and a lender still likes you), you will be able to write off the remaining balance on your 2010 return.
Health insurance premiums
Any health insurance premiums you pay, including some long-term-care premiums based on your age, are potentially deductible. But you have to add these to your medical expense pot. Medical expenses have to exceed 7.5% of your adjusted gross income (AGI) before they give you any tax benefit.
If you’re self-employed and not covered by any other employer-paid plan, though, you can deduct 100% your health insurance premiums (to the extent of your net income) “above the line.” Above the line means the expense is included in adjusted gross income and doesn’t get lumped in with itemized deductions. That means that not only do you not have to exceed the 7.5% floor, you don’t even have to itemize!
If you’re a qualified educator, you can get an above-the-line deduction of as much as $250 for materials you bought in 2009. That includes books, supplies and even computer equipment.
You qualify if you’re a kindergarten through grade 12 teacher, aide, instructor or principal.
Congress extended the law through 2009, and I’m betting they’ll renew the break for 2010.
Student higher education expenses
For 2009, if your adjusted gross income isn’t more than $65,000 ($130,000 on a joint return), you can get an above-the-line deduction of as much as $4,000 for any higher-education expenses you paid.
See if you qualify for the American Opportunity and Lifetime Learning credits. The American Opportunity Credit is worth as much as $2,500 per student in 2009. The Lifetime Learning Credit is worth as much as $2,000 per return. Compare the credit with the deduction, and go with the one that gives you the bigger benefit. And, if you don’t qualify for either credit, you may still be able to deduct up to $4,000 in education expenses in 2009. You can’t take both the credit and the deduction, though. Sorry.
Energy Savings Home Improvement Credit
Credits are good because they are a dollar-for-dollar reduction in tax. This is a 30% credit for skylights, outside doors, windows, pigmented roofs, high-efficiency furnaces, water heaters and central air conditioning units installed in your primary residence in 2009 and 2010. This credit is capped at $1,500, but that’s $1,500 off the cost of the improvements — and you save energy as well.
For a complete list of credits, see the IRS Web site.
Investment and tax expenses
Many of us forget tax planning and investment expenses because they are part of miscellaneous itemized expenses. Their total must exceed 2% of your adjusted gross income before you get any tax benefit.
Expenses to track include your employee business expenses, tax preparation fees and even the portion of your legal or accounting fees relating to tax planning. For example, in a divorce, the legal time spent relating to the tax aspects of alimony and child support would qualify. So too would the tax aspects of estate planning.
Many people shortchange themselves on the deduction of investment expenses. They remember the safety deposit box fees. But how about the annual fee paid your broker and any IRA fees you pay directly? You may remember the cost of your investment publications on subscriptions — such as Forbes, Fortune, BusinessWeek, Worth and Barron’s. But how about the investment newspapers you buy off the newsstands? You keep track of your long-distance phone calls to your broker and investment adviser, but how about the mileage to go see them?
Last year brought forest and range fires aplenty, as well as floods and huge snowstorns.
If the president declared your area a disaster area, you could have claimed your loss on either your 2009 or your 2008 return. When new disasters occur, they may also provide tax relief should you sustain any losses.
Every year, the alternative minimum tax catches more and more middle-class people.
You get the $1,000 tax reduction as well as the $2,000 reduction in your income. That’s a nice rate of return on a $2,000 investment. Moreover, if you qualify, you can deduct as much as $5,000 ($6,000 if you’re 50 or older) in contributions to an IRA.
The tax credit disappears as your adjusted gross income increases. But singles with adjusted gross incomes up to $27,750 and joint filers with AGIs up to $55,500 qualify. The limit is $41,625 for heads of households.
Contributions to 401k’s, 403b’s, Simplified Employee Pension plans, traditional and even Roth IRAs qualify as well.
Want to push the envelope? Make a $4,000 contribution into a Roth IRA for 2009 on Dec. 31, then take a distribution in January 2010. Only the income earned during that period will be taxed, and you can get a credit of as much as $2,000. But you can do this only once.