Deductions are the key to reducing your taxable income. They’re easy to overlook – you won’t get a notice in the mail about any of them – but these will help reduce the amount of money that you will need to pay in Federal taxes.
Tax law is constantly changing. My staff and I are always keeping track of new legislation that affects taxes. We will post deductions on this page to keep you informed.
1. Itemized Deductions
I recommend that you keep track of your itemized deductions each year even if you’re in the habit of taking the standard deduction. A lot of people don’t bother with itemized deductions and end up paying more tax than they owe. Here are some ways to you get the most out of your itemized deductions.
2. Vehicle Excise Tax
If you get a bill every year from your state or local government charging you a tax for owning a vehicle, you may be able to deduct that tax. You can also get the tax deduction if you lease a vehicle and your finance company bills you for the tax. The rule is that you can deduct the tax if it depends on the value of your vehicle. If you’re not sure how the tax was calculated, ask your local tax authority.
3. Job-hunting Expenses
If you’re between jobs, it pays to save your receipts for job-hunting expenses. These expenses are deductible as a miscellaneous itemized expense if they were incurred to locate a new job in the same line of work. For example, phone bills, resume advice, and travel expenses may all be deductible.
4. Real Estate Taxes
Real estate taxes are deductible. Don’t forget taxes you paid indirectly, such as taxes paid through a mortgage escrow account. If you bought a house, check your settlement statement for any taxes for which you reimbursed the seller at the closing. These taxes are deductible, too.
5. Cost of Tax Preparation
Tax software expenses, tax preparation fees, and other tax preparation and filing expenses are all deductible on your tax return as a miscellaneous itemized expense. Be careful to deduct them on the return for the year in which you paid the costs. For example, the cost of preparing and filing your 2002 tax returns is deductible on your 2003 tax return if you paid the tax preparation expenses in April 2003.
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6. Estate Tax on Income in Respect of a Decedent
Did you receive income on account of someone who died? A common example is a distribution from an inherited IRA. You have to include the IRA distribution in income. If the estate of the person who dies was large enough to trigger estate tax, ask the executor to tell you the amount of estate tax attributable to the IRA distribution. This amount is tax-deductible.
From Last Year´s Return
Always have last year’s federal and state tax returns handy when you’re doing your taxes. There are a number of items which can save you money if you know where to look.
7. Capital Loss Carryover
If your capital losses are greater than your capital gains, you won’t have to pay tax on the capital gains. You can also deduct up to $3,000 ($1,500 if married filing separately) of the capital loss, offsetting other income you may have. Any losses above the cutoff are called a capital loss carryover and are treated as a capital loss on the next year’s return. So if you have a capital loss one year and a capital gain the next year, remember to use your capital loss carryover to reduce your taxes in the later year.
8. State Tax You Paid in April With Your Return
Did you owe taxes when you filed your 2002 state tax return? That check you wrote in April can help you when it’s time to pay your 2003 taxes. State income taxes are deductible in the year they’re paid, but a lot of people forget about that April tax payment when they’re doing their taxes for the next year.
9. Reinvested Dividends
Often a mutual fund account is set up to automatically reinvest dividends in additional share purchases. When you get around to selling stock that was purchased this way, your basis-the amount you subtract from the sales price to figure your gain or loss-should include these reinvested dividends. It’s up to you to keep track of the reinvested dividends unless your fund does it for you.
10. Credit for excess Social Security Tax
If you work for more than one employer during the year, look into the credit for excess Social Security tax. Each employer you work for will withhold Social Security tax as if you didn’t work for anyone else. Once your wages reach the Social Security limit – $87,000 in 2003 any Social Security tax withheld after that is treated as a credit against the regular tax you owe for the year.