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Laura Rowley Money & Happiness

Laura Rowley, Money & Happiness

Overlooked Tax Deductions for Last-Minute Filers

by Laura Rowley

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Posted on Wednesday, April 2, 2008, 12:00AM

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.

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63 Comments

Showing comments 6-35 of 63<< PreviousNext >>
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  • Lori - Wednesday, February 18, 2009, 9:13AM ET  Report Abuse

    • Overall: 5/5

    Very helpful info!

  • Yahoo! Finance User - Wednesday, February 18, 2009, 8:26AM ET  Report Abuse

    • Overall: 1/5

    your info was related to purchases / deductions for 2007. for the year 2008 would have been a better overview.

  • Jeff Daniel - Wednesday, February 18, 2009, 7:16AM ET  Report Abuse

    • Overall: 1/5

    Old news. Ridiculous to rerun the article.

  • steve - Wednesday, February 18, 2009, 1:07AM ET  Report Abuse

    • Overall: 1/5

    When are the American people realize they are being ripped off by private international bankers better known to most Americans as the federal reserve. Private bankers that are bailing out their banking buddies and putting our grandkids and kids into a debt they neither created or had a say in. For that matter neither did the people of America. The federal taxes does not pay for any infrastructure as most Americans might beleive but rather only pays interest on the money the fed loans our government. Watch freedom to fascism for free on google video and get informed its time. This injustice must end and if everyone refused to file or pay the feds would cease and the currency could once again be printed by the government interest free and we as a people would become a little more free. Ready for change your not going to get it with Obama he has brought in the same people responsible for the crisis we now are going to have to live through. His treasure cheated on his taxes twice and was the president of the federal reserve NY branch thats not change thats corruption and to boot he kept the entire bush administrations national security agency staff that again is far from change. We will get change but it will be in higher prices for food and a huge depression because of these stimulus packages that is being sold as a economy booster when in reality it is going to cause hyperinflation. Bad move revolution time .

  • Yahoo! Finance User - Tuesday, February 17, 2009, 10:07PM ET  Report Abuse

    • Overall: 5/5

    Thank you for the info. especially about the home hvac upgrading, the company did'nt say anything about a tax credit and neither did the tax man. Thanks again.

  • Yahoo! Finance User - Tuesday, February 17, 2009, 10:03PM ET  Report Abuse

    • Overall: 4/5

    info helpful, but not sure if rules and amounts are same for 2008.

  • Racingmom - Tuesday, February 17, 2009, 9:40PM ET  Report Abuse

    • Overall: 4/5

    I bookmarked this article last year - it is the same article - it is even dated April of 2008 (at the top of the article) - but I think the information is still helpful and general enough to not be outdated.

  • Yahoo! Finance User - Tuesday, February 17, 2009, 9:33PM ET  Report Abuse

    • Overall: 4/5

    Thank you for the new update on tax deductions. We need all the deductions we can get and we don't want to miss any thing.

  • disappointed - Tuesday, February 17, 2009, 9:33PM ET  Report Abuse

    • Overall: 5/5

    excellent inf. but needs updated thank you

  • Rafek - Tuesday, February 17, 2009, 8:37PM ET  Report Abuse

    • Overall: 4/5

    Very Educational article.....

  • jack-in-the-box - Tuesday, February 17, 2009, 8:18PM ET  Report Abuse

    • Overall: 1/5

    looks like you are recycling old stuff. your dates consistently say 2007. If this is so, how do we know the rules are the same?

  • weoripeu - Tuesday, February 17, 2009, 8:14PM ET  Report Abuse

    • Overall: 3/5

    Why does the article talk about tax year 2007? Is this a re-run from last year?

  • Yahoo! Finance User - Tuesday, April 15, 2008, 9:35AM ET  Report Abuse

    • Overall: 4/5

    I am a paid tax preparer. This is all great advice. As I tell all my clients, if you can support your deduction with receipts, etc. and you feel that you are entitled to claim them, go ahead. The worst thing IRS can do is deny it and make you pay the difference. There is no penalty for trying to claim something that you think is legit as long as it is within reason and you can substantiate it. On the other hand, Fraudulent returns are ones that cannot be supported by documentation, or that contain things that are obviously false. One of the favorites is claiming 100 percent of the mileage on a vehicle as business mileage. You cannot claim trips to the grocery store. If you are writing off your computer as a business expense, you had better not have EVER had ANYTHING on it except your business related stuff, period.

  • Uncle Dale - Tuesday, April 15, 2008, 8:17AM ET  Report Abuse

    • Overall: 4/5

    Good basic reminders. However, points on a refinaced mortgage are not deductible in the year paid (unless part of the new mortgage is used to finance improvements). Rather the points must be prorated over the life of the loan (IRS News Release IR-2003-127), Other than that, very good.

  • Yahoo! Finance User - Tuesday, April 15, 2008, 1:37AM ET  Report Abuse

    • Overall: 3/5

    If you go into the Miscellaneous Dedcuctions under the "the more the merrier" paragraph. It is an official IRS document saying what you can and cannot deduct. (A no brainer)

  • quest - Saturday, April 12, 2008, 12:32AM ET  Report Abuse

    • Overall: 2/5

    Just for clarification on the home office: Here is the rule: Principal place of business. If you have more than one place of business, the business part of your home is your principal place of business if: • You use it regularly and exclusively for administra- tive or management activities of your trade or busi- ness, and • You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Otherwise, the location of your principal place of busi- ness generally depends on the relative importance of the activities performed at each location and the time spent at each location. If these rules apply to your home office - take the deduction. As with ALL deductions and credits you should keep good records.

  • Yahoo! Finance User - Tuesday, April 8, 2008, 3:51PM ET  Report Abuse

    • Overall: 1/5

    More and more people are claiming to be a tax expert or pro. Next, you will see her readers filing fraudulent tax returns claiming all these dubious unreimbursed employee business expenses.

  • rgvbanker - Monday, April 7, 2008, 11:03PM ET  Report Abuse

    • Overall: 4/5

    I would' ve to give some credit on this article, nice reminder! Good job!

  • Elliott - Monday, April 7, 2008, 1:47PM ET  Report Abuse

    • Overall: 2/5

    This is misleading. Many people think that they get deductions if they have these expenses. What she doesn't tell you is that many are only deductible on Schedule A and/or only useful to the extent you have a tax liability. For example, sales tax only helps if greater than state income tax. Points paid to refinance must be amortized-$1000 in points on 20 year mortgage is a $50 a year deduction on schedule A. Claiming office in home is about #1 flag for an audit. There is no mention that standard deuction for Married filing jointly is $10,700 half that for single or married filing seperate. Thus if you have 10,600 in schedule A deductions, you lose if you actually itemize. If you can't research these items on your own, get a tax adviser.

  • John - Monday, April 7, 2008, 10:05AM ET  Report Abuse

    • Overall: 4/5

    Good reminders

  • Macx56 - Monday, April 7, 2008, 2:24AM ET  Report Abuse

    • Overall: 3/5

    Pretty interesting stuff

  • sassy - Saturday, April 5, 2008, 10:51PM ET  Report Abuse

    • Overall: 2/5

    I was hoping for something new .....too basic...same advice I read every year.

  • wealthencyclopedia.com - Saturday, April 5, 2008, 4:44PM ET  Report Abuse

    • Overall: 2/5

    These are about as basic as can be. One more thing to add - if your boat is enclosed ( a yaht, for example) and has a kitchen and a bathroom ( almost all yahts do) - it qualifies as a scond home, so any interest you pay on the boat loan is tax deductible on Schedule A.

  • Ralph - Saturday, April 5, 2008, 2:22PM ET  Report Abuse

    • Overall: 2/5

    The last three bullet points are all subject to to 2% Floor of your income which does not get mentioned.

  • Yahoo! Finance User - Saturday, April 5, 2008, 10:58AM ET  Report Abuse

    • Overall: 2/5

    The one I see experienced CPAs miss all the time is the fact that interest from certain agency bonds are exempt from state taxes. ( Even though it isn't broken out on the 1099 as US Govt.).

  • Yahoo! Finance User - Friday, April 4, 2008, 6:31PM ET  Report Abuse

    • Overall: 4/5

    Thank you for providing a check list which can help some in taxes.

  • Adnan - Friday, April 4, 2008, 5:39PM ET  Report Abuse

    • Overall: 1/5

    "Overlooked?" You don't deserve these deductions if you overlooked them - as basic as it gets...

  • JamesM - Friday, April 4, 2008, 10:47AM ET  Report Abuse

    • Overall: 1/5

    If you dont know these basic deductions you should be going to someone to file your taxes. Its a nonsense article only for the totally tax ignorant people who know zero about taxes. For the rest of us, its a waste of space on Yahoo website.

  • Igor - Friday, April 4, 2008, 10:34AM ET  Report Abuse

    • Overall: 2/5

    Nothing new, the same advices from all advisors year after year after year.

  • SandyLady - Friday, April 4, 2008, 8:49AM ET  Report Abuse

    • Overall: 5/5

    Better buckle up yer seats, mates: Payroll figures Month over month are showing steady DECREASES....meaning less tax base, more taxes for thee and me. If Mr. Bernake doesn't "see" a recession we need to get someone with better eyesight. Point being, the prudent would do best to wade thru the tax jungle and at least get a grip on what's happening (irs.gov). I do my own taxes and the company's taxes, schedules A-F; yes, it's a major headache and there are umpteen loopholes that benefit a few....but as it stands now, you either figure out how to "game the system" or get drowned by the herd. Yes, the tax code is a joke, yes, its not fair to middle income taxpayers--but until such time as our elected idiots FIX the broken system, its everyone on their own. Those jokers in Congress aren't looking after your interests or mine either.

Showing comments 6-35 of 63<< PreviousNext >>
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