WASHINGTON — Some tax deductions are easy to remember, like your mortgage interest or education expenses. After all, you receive a statement with your mortgage interest paid for the year and parents with children at private universities will certainly remember writing a $20,000 tuition check.
However, plenty of items tend to slip through the cracks because they’re easily forgettable or our tax code is convoluted enough that you may not even be aware of the rule in the first place. When we review our clients’ tax returns, we look for the following:
1. Charitable gifts
Cash donations over $250 must be backed up by an official letter from the charity confirming the amount and date of your donation. However, for smaller gifts — like the $50 you donated to your friend’s 5k charity run — you can keep a bank statement, payroll record or receipt for your records. The rules are a bit different for tangible property and stock donations.
2. Medical expenses
Medical expenses that aren’t reimbursed by your insurance company are often deductible if they exceed a certain percentage of income. However, what many people miss is that they also can deduct these types of expenses for their dependents, like children or elderly parents. The tricky part is what types of medical expenses are qualified. For example, acupuncture expenses are deductible, but cosmetic surgery is off-limits.
3. Insurance premiums
Health insurance premiums that are paid with pre-tax dollars are off-limits, as are premiums paid by your employer. However, many people, such as those without an employer health plan or self-employed people, pay with post-tax dollars and can usually deduct these premiums. This amount is treated as a part of your medical expense deduction and is subject to the same limits. However, if you’re self-employed, you can generally deduct the full amount.
4. Work-related expenses
This can cover a range of items, like the cost of traveling between work locations if you work in multiple offices, the cost of searching for a new job, the cost of a passport for a business trip or dues paid to professional societies and associations.
5. Investment advisor and tax prep fees
Fees paid for investment management services can be deducted, but only fees paid with post-tax dollars. Fees paid directly from a traditional IRA are not tax-deductible. You can generally deduct tax preparation fees paid during the year, too.
6. State sales tax
People tend to remember that they can deduct state income taxes paid during the year from their federal return. However, what many miss is that if they paid a higher amount in state sales tax than state income tax, they can deduct the sales tax instead. Most people pay more in state income tax, but depending on the state tax rate and the amount of stuff you bought during the year — think big-ticket items like cars or engagement rings — the sales tax deduction may be more advantageous.
7. Student loan interest
Interest paid on student loans can reduce your taxable income by up to $2,500 for those in certain income ranges, even if you don’t itemize your deductions. Plus, students who aren’t listed as a dependent can usually deduct this amount from their income if the loan is in their name, even if it was someone else (parents or grandparents) who paid the interest.
And for those with self-employment income:
Self-employed people can claim a deduction for the miles they drive for work-related reasons. The 2015 deduction is $0.575 per mile driven for business purposes. However, be sure to keep a log of the miles you drive specifically for business: You can’t deduct miles driven for personal reasons, even in the same car.
9. Home office
Prior to 2013, the record keeping requirements for deducting home office expenses were burdensome and often triggered an audit of your tax return. Nowadays, the IRS has a simplified option of $5 per square foot of your home used for business purposes. The square footage must be regularly and exclusively used for business purposes and it must be your principal place of business or at least a place where you regularly meet with clients. However, if you use that specific area of your home for personal reasons when you’re not working, you could still be in violation of IRS rules.
Keep in mind, many of these deductions are subject to phase-outs at certain income levels, among other limitations. Make sure you seek the advice of a qualified tax professional when preparing your return.
Tax day is rapidly approaching. The good news is that you have until April 18 this year to file your return, instead of the usual deadline of the 15. The bad news is that many people will still overlook the deductions and credits that could save them money.