The Ernst and Young Tax Guide for 2007 listed 50 of the
most easily overlooked deductions. You may want to purchase
this large book as well as to see publication 529 at
IRS.gov http://www.irs.gov/publications/p529/index.html.
Also see IRS.gov for a list of highlights and what's new
and what's hot at http://www.irs.gov/taxtopics/tc302.html.
Some of these items you are able to deduct as un-reimbursed
employee expenses. Remember ' some of these deductions are
phased out due to income, circumstance or "floor" limits
required. Check with your tax professional to see if these
are applicable to you.
1. Be aware of AMT - the Alternative Minimum Tax
The AMT affects more people now than ever, and sneaks up
and surprises many people with large tax bills. The
alternative minimum tax (AMT) attempts to prevent some who
benefit from tax savings (deductions and credits) by making
sure they pay a minimum tax.
For middle Americans, the most typical cause of AMT tax is
the level or amount of State, Local and Property Tax
combined with miscellaneous deductions like unreimbursed
employee costs; especially if your household income is over
$100,000. According to studies, it's only going to get
worse if Congress doesn't intervene! This is the one part
of the code not adjusted for inflation since its inception
in the 60's. So that's why more and more people are
affected to this tax each year!
You can see if the AMT affects you by consulting the AMT
worksheet in the Form 1040 instructions entitled "Worksheet
to See if You Should Fill in Form 6251 ' Line 45." People
with more complex financial situations should probably
consult a good accountant to help them calculate what they
might owe. For more information go to
http://www.irs.gov/taxtopics/tc556.html.
2. Higher Education Expense Deductions and Credits
You may be able deduct $2,000 or $4,000 of qualifying
tuition expenses, depending on your income. It applies to
expenses for post-high school education for you, your
spouse, or your dependents regardless if you had to take
out loans to pay for the cost. It even counts for Grandma
to pay for grandson's college! Grandma can get the
deduction.
The Hope Credit or the Lifetime Learning Credit have
stricter income limits than higher education deductions to
qualify, but provide greater tax savings because they
reduce your taxes dollar for dollar. Because both of these
types of educational deductions and credits are dependent
upon income levels, year in school, and many other factors,
it's not an easy choice which one is right for your case.
Run all the scenarios or consult your tax advisor for the
best treatment.
3. Medical expense deductions
To be able to deduct medical expenses you must itemize and
expenses are deductible only to the extent they exceed 7.5%
of your adjusted gross income (AGI). Given the high rate of
health care inflation, more people are eligible for this
than in years past. Be sure to keep records of all medical
expenses to see if you qualify each year.
4. Reinvested stock dividends
This is a tip to avoid double taxation. When mutual fund
and qualified stocks pay dividends to investors they are
taxed in that year, whether or not those dividend monies
were paid out to you in cash or reinvested. Most investors
automatically re-invest them in additional shares. When you
own investments, keep all of your statements.
When an investor subsequently sells qualified shares of
stock or the mutual fund, they are taxed on their gain.
Meaning if you invested $9,500 and it grew to $12,000,
$2,500 could be subject to tax in that year. However let's
assume that $9,500 generated $500 worth of dividends that
were reinvested only $2,000 would be subject to tax. Many
people do not keep good records and end up paying
unnecessary tax. Many mutual fund companies will provide
you with records if you do not have them. Each year when
your broker "sells" stocks, a 1099-Div will be generated.
You will need to compare the cost basis of these stocks
against their sale price less commission in order to truly
know how much gain to include in your taxable income.
5. Out-of-pocket expenses for charities and not for profits
You can write off out-of-pocket costs you incur while doing
good works for nonprofit organizations such as churches,
food pantries and schools. Keep records of items purchased
and costs incurred, such as miles driven (14 cents per mile
2007).
6. Child care credit
You may be eligible for the child care tax credit up to 35%
of your qualifying expenses (depending upon your income)
you paid someone to care for your child (under age 13) or
dependents unable to care for themselves (because of
physical or mental reasons) while you work or look for work.
For 2007, you may use up to $3,000 of the expenses paid in
a year for one qualifying individual, or $6,000 for two or
more qualifying individuals. If you have a tax-favored
reimbursement plan at work, you can pay up to $5,000 of
work related child care expenses. If you max-out the $5,000
through work but spend more, you may be eligible for an
additional $1,000.
7. Estate tax on income in respect of a decedent
Did you inherit an IRA or other 'income in respect of a
decedent,' or IRD? Secondly, was their estate large enough
that it was subject to federal estate tax? If so, you may
be eligible for a deduction for the amount of estate tax
paid on the IRD assets.
----------------------------------------------------
Kent E. Irwin, ChFC, CLU, CAP, co-founder and CEO of
eFinplan.com. eFinPLAN is the first and only web-based
comprehensive consumer financial planning software designed
for people who are trying to do a lot of their own
financial planning. Find out more about how do-your-self
financial planning and how to reach your goals at: =>
http://www.efinplan.com/
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