DEDUCTIONS
Should I itemize this year?
The only sure way to determine which method saves the most tax dollars is to run the numbers. Use Schedule A to list all your deductible expenses and compare the total to the standard deduction for your filing status. If your actual itemized expenses exceed the standard deduction, you’ll save money by itemizing.
How much is the standard deduction this year?
If you are single or married filing separately, your basic standard deduction for 2006 is $5,150; head of household – $7,550; or married filing jointly or qualifying widow or widower – $10,300. If you’re over age 65 at the end of the tax year or legally blind, you’re entitled to an additional standard deduction, depending on your filing status.
What expenses can I itemize?
Taxpayers can usually reduce their taxes by itemizing expenses for mortgage interest, taxes, charitable contributions, medical care, casualty losses, and other miscellaneous deductions. If you work with a professional tax preparer, you may deduct the fees you paid to have the return prepared.
Casualty and theft losses are deductible in the year the loss took place. Uninsured losses caused by theft, vandalism, fire, storm, or similar causes are deductible only if you itemize and only to the extent they exceed 10 percent of your adjusted gross income (AGI). The first $100 in losses for each event is nondeductible.
Texans won’t want to overlook the state and local sales tax deductions. Texas taxpayers who itemize their tax deductions may either save their receipts or use the IRS sales tax tables to determine how much to deduct.
Other common deductible expenses include home mortgage interest expense on up to $1 million in home acquisition debt and $100,000 in home equity debt, state and local income and property taxes, and charitable contributions to qualified organizations.
Gifts of $250 or more require a statement from the charitable organization showing the amount contributed and whether you received any goods or services in return. A canceled check is not sufficient proof. If you give a non-cash gift worth more than $5,000, you must get a qualified appraisal to deduct it.
The rules have changed for donating clothes and household items. Beginning with contributions made after Aug. 17, 2006, no deduction is allowed for most contributions of clothing and household items unless the donated property is in good used condition or better.
Medical expenses exceeding 7.5 percent of your AGI also may be deducted. Examples of deductible medical expenses include fees for doctors, dentists, chiropractors; insurance premiums for medical and dental insurance; prescription medications; hospital care; X-ray and laboratory services; and other related costs.
Miscellaneous expenses exceeding 2 percent of your AGI are deductible. This category includes un-reimbursed employee business expenses, investment expenses, and tax preparation fees, among others.
I’ve heard CPAs talk about bunching my deductions. What is it and how does it work?
If you tallied all qualified expenses and came up short for 2006, don’t assume you can’t itemize in future years. Consider alternating between taking the standard deduction one year and “bunching” deductible expenses into the year you itemize. Bunching refers to the process of timing your expenses so that they are higher in one year and lower the following.
The easiest deductions to juggle between tax years are charitable contributions, state and local income and property taxes, and your January home mortgage payment. For example, you could double up on your charitable contributions and make them every other year rather than annually. In the year you decide to itemize, you can make your January mortgage payment in December to boost your mortgage interest expense. You should also try bunching deductions subject to AGI-based limits like medical and dental expenses and miscellaneous itemized deductions. Timing elective medical procedures, such as braces and laser eye surgery, is a common way to qualify for the deduction.
Be aware that if your AGI exceeds certain amounts, your total allowable itemized deductions may be reduced. For 2006, your itemized deductions may be reduced if your AGI exceeds $150,500 or $75,250 for married taxpayers filing separately. This excludes deductions for medical expenses, casualty and theft losses, and investment interest expenses.
I’ve already filed my return, but I just realized that I could have gotten a refund by itemizing my deductions. What should I do?
If you are willing to recalculate your taxes, you can file an amended return. Form 1040X will let you negate your original standard deduction and, in its place, list all the money-saving deductions you should have taken. Just be sure you still have the paperwork and receipts to substantiate your deductions in the event of an audit. Generally, tax returns must be amended within three years of the original filing deadline. A CPA can help you correct your past returns and provide you with additional strategies for timing your deductions to maximize your tax savings.
Deductions
