Common-sense tax deductions that most average folks can take?

In My Humble Opinion
21

The kicker is that onver the past few years, I have not been taking personal deductions for my wife and I (at least I’m pretty sure I haven’t been). That’s costing me right there. Maybe my employer IS taking the right amount out, but I haven’t been filing right. I’ve been thinking that married couples w/o take the standard deductions and that was it. I’d never known about the personal deductions.

My wife and I jointly paid approximately $440 to the IRS last year. This year, my wife has no salary, so we should be in a lower bracket, percentage-wise. I have the child deduction (about $3,000?) AND the Child Care Credit of $1,000. I expect to get a four-figure refund back this year.

22

Do you mean that in years past, you didn’t even claim the standard deduction for ‘married filing jointly’ for you and your wife (Dr Pepper details the amounts in his post)? I think the IRS would catch that if you don’t even claim yourself. If you are talking about not claiming yourself on your W2’s (some people call it ‘claiming zero’) as far as your employer goes, they take out what you tell them to - you can adjust your W2 and tell them to take out more, or less. If that is the case though that you have been claiming zero, you should have always gotten a refund since you most likely would be overpaying. You should adjust your W2 if you haven’t already since you have a dependent now.

If you’re talking about itemizing, keep in mind that, one again as Dr. Pepper has pointed out, you don’t get to itemize and take that standard deduction. If your itemized deductions are more than the standard, then you should itemize. I don’t see how that would be possible for you without a mortgage, though.

You are right about your wife’s not working this year, that will make a difference. How big a difference depends on how much of a drop in income that was, and whether you adjusted your W2 accordingly. It sounds to me like you need to go talk to your employer and see what you have on your W2’s.

I really suggest using an accountant for one year so you can see exactly what you can and can’t deduct, and he / she can also tell you how much in taxes should be coming out of your paycheck. Then next year if you want you can do it yourself, following this year’s paperwork as an example. At the very least I would use a tax software program, it will walk you through any deductions you can take.

Please note I am not an accountant or anything, I just do my own taxes and file married filing jointly, like you. For the first few years we rented also and got small refunds, but only because we both claimed zero on our W2’s and the standard deduction on the 1040. The big refund (four digits) only came the first year we bought a house, because practically the whole payments are interest at first, and that was when we started itemizing, but that year we both still claimed zero on our W2’s. Now that I know more, we will adjust our witholding on the W2’s so we get more weekly instead of overpaying so much.

It’s confusing the first year you have a big change, especially the first year you itemize. I had my parents around to help me with any questions, otherwise I would have gone to an accountant.

Good luck!

23

A friend suggested that we try filing Married-Seperatly (the one with higher income take the deductions and file head of househould), they said it always saved them money. I have turbotax and will try it both ways once I get my W2, but I was wondering if anyone has every compared.

The situation this year is that I made 98% of the money, and we will have enough in mortgage and taxes to deduct no matter how we file.

Any thoughts?

24

Velma, I think I screwed up above. I just looked at last years 1040, and we had almost 14 grand in deductions and exemptions. That must have been the standard exemption plus our personal exemptions. I was going from memory, and misremembered.

25

Student loan interest! If you’re paying off student loans, you can deduct a big chunk of the interest; it’s $2,500 this year. You used to be above to deduct the interest only for the first 60 months of repayment, but now it’s for the life of the loan. And the best part is that you don’t even have to itemize to take this deduction. Saved me a bundle last year.

Link: http://www.irs.gov/pub/irs-pdf/p970.pdf (see p. 22)

Of course, there is a graduated reduction of the deduction based on your income, but the phase-out starts at $100k for married filing jointly, so I’d say it’s safe to say that it covers ordinary people.

There are a couple of other education/training deductions there, but I haven’t looked at them because they don’t apply to me.

26

I just wanted to add that I used online filing through H&R Block last night to do my federal taxes and was really pleased at how easy it was. I used the lowest price program, it is $24.95 right now and it really sped up the process, and went through everything step by step. It lets you compare itemizing and taking the standard deduction and tells you which is better, and also lets you know what you are eligible for - you just go through a checklist and check all those that apply to you, and if you are not sure you can check it and it will ask you the qualifying questions and tell you. The price includes the cost of e-filing, and for about $15 more you can file your State return also. I recommend it if you don’t have tax software, I found it very user friendly with commonly asked questions on each section. If you want you can pay more and get an accountant to review your return, but I found the Standard program was more than adequate for me.

27

Unless something has changed recently, charitable contributions are treated differently from deductions, and get taken off the top (or bottom, or whatever.) So they are good to track even if you only get a standard deduction.

As has been said, how much you pay and how much of a refund you get are somewhat independent, the latter depending on how accurately your withholding is done. Some people like to get big refunds, which is actually making the government an interest -free loan. Be warned, though, that if you wind up owing too much you will have to make estimated payments for the next year. There might also be a penalty - we’ve never run into that. Since my wife is a free-lancer we need to estimate how much she’s going to make next year to set our estimated payments.

28

I’ve figured them both ways for years and “Married - Filing Jointly” has always been a winner for me. We’re single-income, though. If you’ve got two incomes, separate filings can be beneficial (the “Marriage Penalty” sometimes bites).

Yup - use Turbotax and you can just check with a clickety-click.

29

Sorry, I thought this too, but found out I was sorely mistaken when I did my taxes for the first time on my own a few years ago! Charitable contributions are tracked like any other itemized deduction. Bush was recently pushing to make them “above the line” deductions, but that change has not gone through yet, and if it does I don’t think it will be effective until 2007 anyway.

Quick question for tax experts in the thread:

If I have investment expenses (interest on margin loans) and I have some investment income, can I subtract all my expenses from the investment income? (I know that I cannot subtract the expenses from long term capital gains) I assume that I can, but it seems weird because I still own the stocks that I am being charged loan interest on. Does that matter? Thanks.

My deductions are mortgage interest + property taxes + student loan interest + charitable giving and this will put me far above the standard deduction.

Oh, another question! I heard that if you work from home, even occasionally, and you buy a new computer, it can be a deduction. True?

30

I order a Publication 17 from IRS every year. It goes into plain language detail about every aspect of your 1040. If there is more information to be had, it tells you the number of the particular booklet to order, for example, if you sold a house for your parents and are unsure if all or part of the gain is tax-free, e.g. your parents went into a rest home: is that counted toward the two year requirement.

In January I start using a very simple program I devised in Lotus (I like Lotus!) that adds up all my income, deductions, and credits and calculates my taxes for that year. As deductions come along, for example medical and dental expenses, I just put them in and it recalculates. I use this to keep my withholding at the correct amount so I won’t owe or have to pay anything when I file.

You change your withholding with a W-4. You can claim so many dependency exemptions and in conjunction with your filing status the withholding is taken from a table; or, you can just designate a dollar amount. That’s the best. I believe in having as much of my own money as I can, now.

There are no magic, mysterious deductions; but, there are unknown deductions. For example, if you drive from home to a temporary job location and have no permanent job location, but travel from there to another temporary job location, and not sent away on a long-term job assignment (over a year), you can deduct the miles from your house (tax home) to your various job locations. You can also take a meal allowance if you are away overnight.

Also, seminars, including plane fare and hotel, fees are deductible if job-related.

And the Lifetime Learning Credit can be taken anytime you take a class; and it’s credited directly against your tax. If you have a child in college, you can take the Hope Credit for the first two years and it’s a big one.

You can deduct medical/dental expenses you paid for anyone who is your dependent, and your child who does not live with you and is not your dependent or anyone you help to support under a multiple support agreement. Health insurance premiums are so high these days that they have become one of the larger deductions. From the total, 7.5% of your AGI is subtacted.

Self-employed people can deduct almost everything related to their business, but employees are the ones who miss deductions related to their work.

I use TurboTax and it’s great. But, you really do need to know a little about what’s deductible. You can click on informative notes in the program. If you take your time the first year and use the program to its utmost and also the Pub. 17, in subsequent years all you will have to do is review the changes for the year, which are in front pages of the Pub. 17.

31

Ok, since this seems to be sort of a general “tax” advice thread, I hope I’m not hijacking.
My wife and I are getting killed in our taxes. Last year we had to pay nearly $3k, we changed our withholding to 0 on both our W-4’s right after that, and if it wasn’t for the fact that we donated her car, and did a lot of other charity donations (total of about $4K), we’d have had to pay this year. As it is, with all the charitie deductions, and our mortgage interest, we’re only getting back $300 or so. I make about $60K a year, and my wife makes $32K or so. We have no children, and no other deductions besides what I listed above. So what can we do to try and minimize the amount we’re paying? I know I can have more taken out of my check, but it just doesn’t seem right that we both claim 0, and still have to pay.

Right now I’m not having anything taken out for 401K…we’re really really trying to get all of our credit card stuff paid off, and I want every spare cent to go to that. While we do have some medical expenses, it’s nowhere near the 7.5% we’d need to be able to deduct it. Should I try setting up a Flexable Spending accout for next year, to cover some of those expensis that we know we’ll always have?

Any advice would be helpfull, as I think we fall into that tax bracket where the gov. assumes that we’re better at doing something with our money than we are. Right now we just pay all the extra to Credit Cards, in hopes that we’ll be debt free in another 2 years.

32

If your employer offers a 401(k) program, definitely take advantage of it. The money’s taken out of your check pre-tax, BUT you also get to take a percentage of it off your taxes as some sort of investment incentive program.

33

This tends to happen when one person earns a lot more than the other. What happens is that your wife’s employer does not withhold nearly enough from her checks, because the money is withheld at a rate for a $32k/year household rather than a $90k/year household. You probably need her employer to withhold an extra $100/month or so from her paychecks and maybe a little from yours too, since I think $92k puts you in a different tax bracket than $60k. Still, $3k in overdue taxes does seem awfully high, especially since you have mortgage interest to write off.

You should consider getting a Home Equity loan to pay off your credit card debt. The interest may be a little higher rate than the special deals you can get on balance transfers (if you don’t have special deals, you should DEFINITELY get a Home Equity loan) but it gives you additional tax writeoffs because the interest is all tax deductible.

Can anyone answer my questions above about investment expenses? And a deduction for a home PC used for work?

34

Your investment interest goes on Line 13 of Sch. A

If your employer requires you to do some work at home, you can calculate the depreciation on the computer (special rules) and take the business use percentage as a deduction under employee expenses on the Sch. A.

All this is in Pub. 17, a really handy guide to taxes. Get it at the library or order from IRS.

35

Wait…

I can deduct the massive amounts of money ($3k+) that’s deducted from my paycheck as part of my insurance premiums?

Note: I’m a standard W-2 employee…

-M

36

My first wife and I found this out the hard way. If you are both working, make sure your W-4s are filled out to withhold at the higher single rate.

Another rule of thumb I keep is to take one less exemption than I am enntitled to. I’d rather pay too much each payday than too little. Sure, it’s a no-intrest loan to the Government, but I figure it’s easier than scramble to find a couple of hundred dollars each April.

37

Yes, medical insurance premiums, along with all medical, including eyeglasses and transportation to and from the doctor, long term care insurance premiums (limited), and dental expenses are part of your medical deduction on Sch A. They are subject to a deduction of 7.5% of your Adjusted Gross Income. This is one way your 401K can help you; it reduces your AGI and thus increases your medical expense deduction. These days with insurance so expensive, that is the amount that may take you over the 7.5%, unless like me, for example, you spent thousands on dental implants or are eldery and had high prescription expense or medically related convalescent home expense. But, of course, whether or not you get a deduction depends on high your AGI is.

Taxes have gone down again this year. For married filing joint, the first 14,000 of TAXABLE income is only taxed at 10%, and then the next 14,000-56,800 is taxed at 15%.

38

I don’t think medical insurance premiums are deductible unless you are self-employed, or if you pay them via an individual plan that you pay with post-tax dollars. Most people have them deducted from their salary pre-tax, not post-tax. How can they be deductible if you haven’t paid any taxes on them in the first place? I’m trying to find out for sure but if anyone can provide a cite, please do.

39

I am checking Publication 17 and it seems to say that yes, premiums are deductible. It doesn’t mention any difference whether they were paid pre-tax or post-tax. I shall have to investigate this and possibly file amended returns.

40

Well, I checked with my company’s tax attorney and our CFO, who has a master’s in Taxation and handles our very complicated returns (both our company’s and the owners’ personal returns), and they both said you cannot deduct premiums withheld pre-tax from your salary. TurboTax also says in its medical deductions section in reference to premiums, “But, if your employer withholds an amount from your paycheck that you don’t pay tax on, you can’t take a deduction for it.” This would agree with my statement that you cannot take a deduction on monies you haven’t paid any taxes on in the first place.

If someone knows something I’m missing, please chime in.