Laura Rowley Money & Happiness

At this time of year, many people fear not finishing their tax returns on time, or getting hit with a big bill they can't cover. My worry is the tax code itself -- the thing is so big, so complex, with such a random assortment of deductions and credits, that I'm sure I'm missing something.

For instance, when my husband and I switched accountants a few years ago, the new one asked if we put money away for college. I told her we contributed to 529 college savings accounts in New York. She told me our previous accountant hadn't taken the state tax deduction we were entitled to on our prior-year return.

Tax Yourself on Deductions

The roughly one-third of Americans who itemize their returns typically know about the big deductions -- mortgage interest, charitable giving, qualified retirement-related contributions. But there are a whole host of other categories that many people overlook.

I use a professional for fear that I'm not maximizing my deductions (and the fact that my husband and I both run our own businesses), and an estimated 40 million people rely on tax software. If you don't use either -- or if your tax preparer makes minimal inquiries about your finances -- here are some questions to ask yourself so you don't miss opportunities to reduce your 2007 tax bill:

• Did you refinance your mortgage last year?

Any "points" you paid to reduce your mortgage interest rate are deductible, along with your mortgage interest. Did you pay a prepayment penalty to get out of your old mortgage? That may be deductible as well.

If you purchased a new home, don't forget to look at your closing statement and deduct the real estate taxes paid at closing and any points on your mortgage.

• Did you have a major medical problem in 2007?

The IRS allows you to deduct medical expenses that surpass 7.5 percent of your adjusted gross income. That sounds like a lot -- someone making $60,000 could deduct any expenses beyond $4,500. But the IRS has an extensive list of what qualifies as medical expenses.

Health insurance premiums you pay out of pocket, co-pays, prescriptions, and lodging for medical purposes (up to $50 per person) are all deductible, as are therapies to stop smoking. In addition, if you had to drive to the doctor's office, an X-ray facility, physical therapy, or a medical supply store to pick up crutches or a wheelchair, you can deduct the miles you drove, parking, tolls, and the like. Even a portion of your insurance premiums for long-term care can be deducted.

• Do you work at home, and have an office that's exclusively devoted to work?

If so, you can deduct a percentage of your rent or mortgage, utilities, homeowner's insurance, and maintenance for the room. Just make sure it's your primary office, and doesn't double as a guest suite on weekends, says New York CPA Eliot Lebenhart.

"You have to have the production of your income take place there," Lebenhart explains. "I do a lot of work in the entertainment businesses, and I don't deduct it because my clients are usually just doing record-keeping there, they're not performing or modeling in the home." Also, if your employer provides a space for you at work and the home office is merely for convenience, don't take the deduction, he says.

Lebenhart says states are becoming aggressive about auditing on home offices so they don't miss out on revenue. New York managed to collect income tax from an employee who worked and lived in Tennessee (he telecommuted and was only in his New York office 30 days during the year). It also collected state income tax from a college professor who taught a day or two in the state but otherwise worked at home in Connecticut.

• Did you pay any bills related to education for yourself or dependents?

You can deduct up to $2,500 of the interest on a student loan. Depending on your income, you can take advantage of the Hope Credit for qualified expenses for the first two years of undergraduate education or the Lifetime Learning Credit from sophomore year through graduate school. (You can't claim both simultaneously.)

Your state may offer additional tax benefits related to educational expenses.

• Did you pay for child care for a kid under age 13 while you worked full-time?

You can deduct expenses up to $3,000 related to a babysitter, day care center (including after-care services at your child's school), and summer day camp.

• Did you buy a car or boat in 2007?

The IRS allows taxpayers to deduct either their state income tax or sales tax, whichever is higher. (Clearly the big winners here are residents of the nine states that collect no income tax, such as Nevada and Florida.) To figure out if the sales tax deduction makes more sense than deducting state income tax, check out this tool.

• Did you make home improvements to boost energy efficiency in 2007?

The IRS offers a $500 credit to property owners who upgraded windows, doors, roofs, insulation, HVAC equipment, and non-solar water heaters last year. (This IRS provision has expired, so you had to do the work in 2007; you can still get credit on next year's return for solar water heaters and panels installed in 2008, however.)

The More the Merrier

The IRS also has a plethora of "Miscellaneous Deductions," including many work-related expenses that aren't reimbursed by your employer. You can claim only the amount of these expenses that total more than 2 percent of your adjusted gross income:

• Did you search for a new job in your field?

Even if you were unsuccessful in your quest, you can deduct expenses for the phone, travel, employment agency and job counseling, resume preparation, copies, and postage. (You can't take this deduction if you're searching for your first job out of college or are changing careers.)

• Did you have to travel or buy work-related clothing or supplies?

You can deduct expenses related to travel that your employer does not reimburse (even those related to getting a passport). You can also take depreciation on a cell phone or home computer your employer requires for work-related needs.

Subscriptions to industry publications and professional journals, and legal fees related to doing or keeping your job (such as a contract negotiation), are also deductible.

So are union dues, uniforms, protective gear, tools, equipment, or other work-related clothing and supplies. (Watch out on uniforms -- a nurse's uniform can be deducted, but not something adaptable for other uses like a formal white shirt and black pants required to work as a waiter.)

• Did you pay for job-related continuing education?

"You can take this deduction if it helps you maintain your position, but not if it's to get you a new position," says Lebenhart.

For instance, an accountant who wants to take the CPA exam can't deduct the cost of the review course. But once he becomes a CPA, he can deduct the cost of continuing education required to maintain his CPA certification.

A Word on Documentation

Be sure to hang onto the receipts related to tax deductions for at least three years. If you already filed and missed a hefty deduction, you have three years to file an amended return.