It’s almost time to file your taxes, so if you haven’t started filling out your tax forms yet, now would be a good time. While most people opt for the standard deduction, depending on your family’s fiscal situation, you may actually get a bigger return if you file itemized deductions. There are also certain credits or deductions you may qualify for without having to itemize. However, it can be tricky to figure out which items you’re allowed to write off, which types of write-offs look fishy to the IRS, and which ones just plain aren’t allowed. The same goes for small business owners and independent contractors in regards to business expense-related write-offs. Use the guidelines below to make sure you get the biggest tax refund without doing anything that would incur penalties in the event that you’re ever audited.
Don’t Miss These Deductions
• Interest paid on your mortgage – In many cases, this item alone may exceed the standard deduction and thus make it smarter to itemize. See this IRS resource for more information on home mortgage interest deduction.
• Points paid on refinancing – Also includes unamortized points on old refinancing.
• Energy-saving home improvement upgrades (such as solar panels, energy-efficient windows, energy-efficient water heaters, etc.) – Via the Energy Savings Home Improvement Credit. Depending on which state you live in, you may also qualify for credits on the state level.
Business and Career-Related:
There are a great number of business expenses that you can write off. Consult this information about deducting business expenses from the IRS. Some business and career expenses that people sometimes miss include:
• Child-care costs
• Union dues
• Job hunting and moving costs
• Educator expenses – Qualified K-12 educators can get an “above-the-line” deduction (meaning it’s deducted from your adjusted gross income and you don’t have to itemize) for materials bought in 2011.
• Higher education costs
• 401K contributions – Via the Retirement Savings Contributions Credit
• Health insurance and Medicare premiums – Medical expenses must exceed 7.5 percent of your adjusted gross income for you to get any tax benefit here, UNLESS you are self-employed and are not covered by an employer-paid plan, in which case you can deduct 100 percent of your health care costs, above-the-line.
• Charitable contributions – Includes cash and non-cash donations, such as furniture and clothing donations to the Salvation Army.
• Investment and tax planning expenses – Includes safety deposit box fees, fees related to estate planning, and others; the total must be greater than 2 percent of your adjusted gross income for you to benefit.
• Sales tax – You can write off sales tax if the amount of sales tax you paid last year exceeds the amount of income tax you paid. This one may work for you if you live in a state with low or no income taxes.
Be Careful With These Risky Write-Offs
• Home office – If you are self-employed and have a room in your home that is strictly dedicated to your work, you can write off a home office, including a portion of the rent and utilities. However, you shouldn’t attempt this one unless meet the IRS’ strict Home Office Deduction guidelines; otherwise, you’ll be penalized if you’re ever audited.
• Business trips – There’s nothing wrong with writing off travel expenses to attend a trade conference that is crucial to your business – just don’t include your accompanying spouse’s travel expenses or any trip expenses that are not strictly business-related. A lot of people get into trouble here.
• Extravagant or oddball expenses – When you try to write off big-ticket items such as a home pool as a medical expense, or a new Porsche as a business expense, you risk incurring intense scrutiny from the IRS. The same goes for petty and unusual write-offs – like the cop who tried to write off his haircuts.
Definitely Don’t Try These Ones
• Claiming a spouse as a dependent – You can’t do this. But if your spouse isn’t working, file a joint tax return and you’ll receive a hefty exemption totaling about the same amount as you would receive for a dependent.
• Trying to disguise personal expenses as business expenses – Examples may include a cell phone or a computer that you use for both work and business. Some people are also under the mistaken impression that if you work from home, you can write off just about any home-related expense (such as lawn maintenance or 100 percent of your utilities). Don’t attempt this: tax payers don’t want to pay for your cable bill or iPhone apps.
• Inflating the value of charitable donations – The IRS is smart enough to realize that unless you are a multi-millionaire, you’re probably not donating many thousands of dollars’ worth of items to charity every year. As with separating personal from business expenses – or really, just about any other aspect of tax write-offs – just don’t stretch the truth or get greedy here, and you should be fine.