CBS MarketWatch has pulled together a list of 10 deductions that you may have skipped. And for the more common deductions, we've cited some Web links that give you, in clear detail, what's usually allowed and what isn't - as well as the average size of the deductions for you income bracket.
Most folks who itemize their deductions are aware of write-offs for mortgage interest, property taxes, charitable contributions, traditional IRAs and medical expenses (as long as the medical costs exceed 7.5 percent of their adjusted gross income).
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Let's make sure you know what the easy ones cover. Did you know, for example, medical deductions could include lodging costs of up to $50 a day for out-of-town medical treatment; or costs of home improvements made on the advice of a doctor?
Your auto license and registration fees may be deductible if your state bases the fee on the value of the car. And deductible interest expense includes margin interest on brokerage accounts up to the amount that it's offset by investment income.
When giving to charity you can't deduct your donated labor, but did you know you can write-off use of your car (at 14 cents a mile), supplies you bought and other out-of-pocket costs?
Recent tax law changes have created new potential write-offs that may surprise you. Let's take a look.
1. Child credit
For each qualifying child you may be able to claim a tax credit of up to $400 this year for the first time. This credit isn't the same as child and dependent care expenses. The child must be under 17, a U.S. citizen and someone you claim as a dependent whether he or she is your child, grandchild, stepchild or foster child.
2. Education benefits
There are a host of new credits for education for you or your children. The Hope credit allows you to claim a tax credit of up to $1,500 for each eligible student in their first two years of college. It's used to cover tuition, fees for enrollment, and books, supplies and equipment for school. The credit requires at least half-time student status.
The Lifetime Learning credit is slightly different. It covers up to $1,000 of expenses paid after June 30, 1998, for tuition and expenses. It may be used for all students who are enrolled in college and isn't limited to the first two years. It will cover graduate level courses.
Choose wisely because each student can elect one or the other in any tax year OR a tax-free withdrawal from an education IRA.
3. Student loan interest You don't need to itemize to qualify for this deduction. You may be able to claim up to $1,000 for interest you paid on a qualified student loan. Use Form 1040, line 24, or 1040A; line 16, to claim the deduction.
4. Penalty-free IRA withdrawals
This is not so much a deduction as a break for first-time homebuyers and families trying to cover education costs. This year you may avoid the 10 percent additional tax if you withdraw funds from your IRA before age 59 1/2, if you use the money for higher education expenses or to buy or build a first home.
You may also avoid the 10 percent penalty for early IRA withdrawals to pay medical expenses and medical insurance premiums after losing your job.
5. Capital gains 18-month holding period gone
This will be such a relief it will feel like a tax deduction. Last year there were three holding periods for reporting capital gain. Congress has eliminated to longest period (more than 18 months) to return to a two-rate system. You must hold property, such as stocks, for more than one year for the lower tax rate, known as the long-term rates (10 percent for those in the 15 percent tax bracket and 20 percent for everyone else). Anything held less than one year before it is sold is taxed at the short-term rate, which is your ordinary income rate.
There are lots of rules affecting taxes on capital gains and losses. For example, capital losses offset capital gains dollar for dollar. People with additional capital losses may deduct up to $3,000 against earned income. Any amount exceeding that you may carry forward to future years and claim the losses then, up to the $3,000 annual limit.
6. Investment costs
Miscellaneous deductions are subject to the 2 percent limit, which means you must reduce the total of your miscellaneous deductions by 2 percent of your adjusted gross income. Only the amount above that will be deductible. Don't overlook a number of things that can bump you over that limit.
The expenses of producing income are deductible. For example, you may deduct depreciation on your home computer if you use it to produce income, such as management your investments that produce taxable income. You may deduct subscriptions to publications that help you produce income. The cost of replacing lost, stolen or destroyed securities is deductible.
Fees you pay to a broker, bank or trustee to collect investment income are deductible. (You can't deduct a fee you pay a broker to buy investment property, such as stocks and bonds, but you add the fee to the cost of the property to lower your tax liability when you do sell.)
You may not deduct expenses of attending shareholders' meetings if your interest is only as a shareholder. You can't deduct the cost of attending an investment-related seminar or convention.
7. Job search deductions
You can deduct some expenses while looking for a new job in your current occupation, even if you don't get the new job. Yocan't take the write-off if you are changing occupations or there was a long break between the end of your last job and your new one.
Deduct the costs of employment agency or outplacement agency fees while you are looking for a job. Write off the cost of printing and mailing copies of your resume. Travel to a new area to look for a new job is deductible if the trip was primarily to look for work.
8. Home sale
There are so many possible deductions here that if you sold your home you better do some research so you don't miss anything. What was a once-in-a-lifetime deduction is now available as much as every two years. You may exclude the entire gain on the sale of your main home, up to $250,000. You must own the house at least two years and live in the house as your main home at least two years.
Dozens of different improvements you may have made to your home over the years may be added to your cost and thus lower the taxable profits on the sale. These improvements include things that have a useful life of a year or more; an addition to the house; special assessments for local improvements and costs of restoring damaged property. These items would include things like new plumbing or wiring, finishing a basement, a new fence or roof and paving an unpaved driveway.
9. Home equity interest
The interest on debt from qualified home equity loans is deductible even if you use the proceeds for personal expenditures. Only a limited amount of interest paid is deductible as qualified residence interest. The total amount of the debt may not exceed $1 million and the total amount of how equity indebtedness may not exceed $100,000.
10. Self-employment deductions
There are a number of self-employment benefits that you may deduct. Up to 45 percent of health insurance premiums for you or your spouse are deductible if you are self-employed. You may deduct one-half of your self-employment tax. Take that on line 27 of Form 1040.
The deductions for business use of a portion of hour home must meet very specific IRS requirements, but the deductions can be very beneficial. The IRS, Publication 587, Business Use of Your Home, includes a formula for figuring out what percentage of your home qualifies as a home office for a business deduction.
Written By Pam MacLean, CBS MarketWatch