If you don't know about a potential tax break, you won't take it. Here are the deductions that a lot of taxpayers often forget.
Noncash contributions
Charity, as I hope everyone remembers, begins with a tax deduction. If you didn't have the cash to contribute in 2008, I hope you charged it. And, likewise, if you don't have the cash when it comes time to contribute in 2009, go ahead and charge it. The deduction is allowed in the year of the charge, not when you actually pay the bill.
Get a receipt from the charity to which you made a donation, and, if you're still worried about documentation, get the credit card company to send you their record of the transaction.
Now, let's say you emptied your closets and gave everything to Goodwill or a similar charity. The value of your donated items -- clothes, furniture, whatever -- is deductible. Get a written receipt. With noncash charitable contributions, the rule is simple: No receipt means no deduction if you get audited. Clothes and household goods must be in good or better condition to get the deduction.
If you've already dumped your old clothes in a Salvation Army box and walked away without a receipt, take the deduction anyway. You've legitimately made the contribution. You just may not be able to prove it in an audit. Starting with 2007 returns, the law has required a receipt or some sort of written confirmation for all charitable donations. Feel lucky? Play the audit lottery. You're still an honest person.
New points on refinancing
With interest rates so low over the past few years -- even in 2008 and definitely in 2009 -- lots of homes have been refinanced, sometimes more than once.
Any points you pay to refinance your home can be deducted on a monthly basis over the life of the new loan. So, if you refinanced your mortgage on June 1, 2008, for a 20-year term, seven out of 240 months will have passed after Dec. 31. If you paid $2,400 in points, you can write off $70 ($10 a month for seven months) for 2008. You can write off $120 for 2009 and each year thereafter until the points have been deducted in full. The amount may not be huge, but every little bit helps.
Old points on refinancing
This is one deduction lots of people miss. All unamortized points on an old refinancing are deducted in the year of a new refinancing.
- Talk back: Should I report a tax cheat?
So, let's say you refinanced on June 1, 2007, and paid $2,400 in points. You refinanced again on June 1, 2008. You can deduct all the remaining points on the 2007 loan on your 2008 return. That's $2,280 plus the $50 you could deduct for January through May 2008. Likewise, if you refinance the 2008 loan in 2009 (if interest rates stay low and a lender still likes you), you will be able to write off the remaining balance on your 2009 return.
Health insurance premiums
Any health insurance premiums you pay, including some long-term-care premiums based on your age, are potentially deductible. You have to add these, however, to your medical expense pot. Medical expenses have to exceed 7.5% of your adjusted gross income (AGI) before they give you any tax benefit.
But if you're self-employed and not covered by any other employer-paid plan, you can deduct 100% your health insurance premiums "above the line." Above the line means the expense is included in adjusted gross income and doesn't get lumped in with itemized deductions. That means that you not only don't have to exceed the 7.5% floor, you don't even have to itemize!
Educator expenses
If you're a qualified educator, you can get an above-the-line deduction of as much as $250 for materials you bought in 2008 and may buy in 2009. That includes books, supplies and even computer equipment.
You qualify if you're a kindergarten through grade 12 teacher, aide, instructor or principal.
Student higher education expenses
For 2008 and 2009, if your adjusted gross income isn't more than $65,000 ($130,000 on a joint return), you can get an above-the-line deduction of as much as $4,000 for any higher-education expenses you paid.
See if you qualify for the Hope and Lifetime Learning credits. The Hope credit is worth as much as $1,800 per student in 2008 and 2009. The Lifetime Learning credit is worth as much as $2,000 per return. Compare the credit with the deduction, and go with the one which gives you the biggest benefit. And, if you don't qualify for either credit, you may be able to deduct up to $4,000 in education expenses in 2008 and 2009.
Clean fuel credit
Credits are good because they are a dollar-for-dollar reduction in tax. And if you bought a new hybrid gas-electric auto or truck in 2008, you can get a conservation tax credit of between $250 and $1,000 and an additional fuel economy credit of between $400 and $2,400, depending on the make and the fuel economy. A hybrid car combines an electric motor with a gas fueled internal combustion engine.
But act quickly. The credit starts to phase out when the auto manufacturer sells its 60,000th hybrid vehicle. That's the total per manufacturer, not 60,000 per model. Once the cap is reached, the phaseout starts at the beginning of the second subsequent calendar quarter.
You can't get a credit any longer on a Toyota Prius, and credits were to run out Honda Civics on Dec. 31, 2008. A number of cars still qualify, including models from Ford, Chevrolet, Mazda, Saturn, Nissan and Volkswagen.
Once 60,000 cars are sold, buyers over the next two quarters can claim only half the credit. In the six months after that, 25% of the full credit. After that, zero.
You get the deduction in the year you start using the car, and you must be the original owner. Take it on your Form 1040 by writing in "clean fuel."
Investment and tax expenses
Many of us forget tax planning and investment expenses because they are part of miscellaneous itemized expenses. Their total must exceed 2% of your adjusted gross income before you get any tax benefit.
Expenses to track include your employee business expenses, tax preparation fees and even the portion of your legal or accounting fees relating to tax planning. For example, in a divorce, the legal time spent relating to the tax aspects of alimony and child support would qualify. So too would the tax aspects of estate planning.
Casualty deductions
Last year brought forest and range fires aplenty, and every one remembers Hurricanes Katrina and Rita, which devastated the Gulf Coast in 2005 and Hurricane Ike, which hit Texas and Louisiana in 2008.
If President Bush declared your area a disaster area, you can claim your loss either on your 2008 return or your 2007 return. You can confirm whether you qualify on the Federal Emergency Management Agency's Web site.
Retirement tax credit
This one also can come with a deduction.
This credit is designed to give moderate- and low-income taxpayers an incentive to save for retirement.
Make a contribution into your retirement account. That money isn't taxed currently. So, it's like you got a deduction off your income. In addition, you get a credit of as much as 50% of the first $2,000 invested. That's as much as a $1,000 reduction in your tax.
