Through deductions, American wage earners have the chance to pocket more income, rather than hand over their hard-earned cash to the government. For those who keep good records, deductions can mean more money them - and less for the IRS. You probably know the most common deductions, such as deductions for property taxes and charitable donations, but there are related deductions you might be overlooking. Read on for some of the common fees and expenses you can deduct to reduce your tax bill.
The Deductions Caveat
Some of the deductions listed here fall under the label of miscellaneous deductions, and they are below the line – that is, you take the deductions after you've calculated your adjusted gross income (AGI). To cash in, you must itemize deductions on Schedule A of your federal return rather than take the standard deduction. The sum of all of your miscellaneous deductions must be more than 2% of your AGI; therefore, if your AGI is $50,000, all of your miscellaneous deductions must top $1,000. The kicker, of course, is that you can deduct only the amount that exceeds 2% (that is, the amount above and beyond $1,000). (For background reading, see An Overview of Itemized Deductions.)
Meeting the 2% requirement for itemizing deductions, doesn't mean you should itemize. Always compare the amount of the standard deduction to the amount you could deduct by itemizing.
Selling Your Home, Sweet Home
Owning a home can give you hefty tax write-offs each year, from deductions on points paid when you bought the home to deductions on mortgage interest and property taxes while you lived in it. When you sell your home, though, you also get some tax benefits: you can deduct the fees you incur to unload your home. You can still deduct a portion of the property taxes you paid while you lived in the home, the commission you paid to your real estate agent lowers the sales price to reduce your capital gains tax, and any fees you paid at closing. (For related reading, see Use Real Estate to Put Off Tax Bills and The Mortgage Interest Tax Deduction.)
Driving Home a Tax Break
You pay a sales tax on your car when you buy it. Some states continue to tax you each year for, as the state of Kentucky puts it, "the privilege of using a motor vehicle upon the public highways." If your state calculates a percentage of the vehicle tax based on the value of your car, you can deduct that percentage as part of your personal property taxes. Only a few states, such as Nevada, calculate their registration fees in this way.
Most states send out a notice to demand their tax payment to register your car each year. After you slap your new decal on your car, file away the receipt and add that payment to your deductions for personal property taxes in April.
Fees for a Worthy Cause
You donated your skinny jeans and your wagon-wheel coffee table to Goodwill and reduced your taxes by increasing your miscellaneous deductions, but you can fatten the sum of your miscellaneous deductions when you remember to include associated fees, such as appraisal fees, for the big-ticket items you donate.
The IRS requires that you provide "a qualified appraisal of the item with the return" when you donate an item worth more than $500. For items like electronics, appliances and furniture, you need to pay a professional to assess the value of your donation; that fee for service is deductible. (For more on charitable contributions, see It Is Better to Give AND Receive.)
Free Rides for Charity
If you're the type of person who likes to donate your free time to volunteer in your community and you dip into your own wallet to get to your favorite charity, you can add those expenses to your miscellaneous deductions. Whether you ride the bus or drive your own car, keep good records of your charitable activities and keep receipts for public transportation or mileage logs for your car (for which you can charge the standard mileage rate for charitable organizations), as well as receipts for parking and tolls.
Washing Away Tax Liability
It's easy to remember to deduct the cost of plane tickets and hotels when you travel for business, but you've got to look snappy when you're networking out of town, and that often means sending suits to the cleaner. Hang on to laundering receipts and you can clean up when the total pushes you over the 2% limit for miscellaneous deductions.
Shipping Out Savings
The IRS understands that you can't lug all your work with you when you travel. Sometimes you have to ship documents, displays or even baggage ahead of time. You are allowed a write-off for shipping and baggage costs as part of your miscellaneous deductions, and because some airlines up the ante of travel by charging you to check your bags, this tax write-off eases the burden of getting your stuff from Point A to Point B. Don't shove that baggage receipt in a coat pocket and forget about it – keep it with your business documents and file it away for April.
Networking for Cash
The business of doing business as you travel means calls to connect with contacts, faxes to confirm orders and internet access to research information. When you pay a surcharge to stay connected, such as for hotel phone calls or coffee shop internet access, count that fee toward your miscellaneous deductions.
Make sure to get itemized bills from your hotel and receipts of your networking transactions so you have solid records. You can even deduct 50% of the charge for the vanilla latte that kept you awake through your boss's lengthy emails when traveling. You can deduct half of what you pay for business meals and entertainment not reimbursed by your company.
Getting Fit Gives Deductions a Leg Up
Staying healthy can cost you an arm and a leg; therefore, the IRS allows you a deduction specifically for medical expenses, but only for the portion of expenses that exceed 10% of your AGI ( 7.5% if you or your spouse is 65 or older). Thus, if your AGI is $50,000 you can deduct the portion of your medical expenses over $5,000. If your insurance company reimburses you for any part of your expenses, that amount cannot be deducted. (Read about how to reduce your healthcare expenses in 20 Ways to Save on Medical Bills.)
According to the Henry J. Kaiser Family Foundation, in 2014 the average United States premium for employer-based health insurance for single employee-only coverage was $5,832 per enrolled employee; the premium for average family coverage was $16,655. Employees paid an average of 21% of the cost for single coverage, and families paid an average of 27%. If you're an individual you could deduct the amount of the your portion of the premium that exceeds the 10% limit. (Remember, you can't deduct your premiums if you buy coverage through a payroll deduction using pretax dollars – in that case you've already earned your tax savings.) (For related reading, see Buying Private Health Insurance.)
A portion of money you pay for long-term care insurance can also ease your tax burden. Long-term care insurance is a deductible medical expense, and the IRS lets you deduct an increasing portion of your premium as you get older as long as the insurance is not subsidized by your employer or your spouse's employer.
There's another often-overlooked benefit when you visit your doc: You can deduct the cost of transportation to obtain medical care, which means you can write off the expense of taking the bus, car expenses (the standard mileage deduction for medical purposes), tolls and parking.
You can also deduct any additional copayments, prescription drugs, lab fees and more as part of your medical expenses - if your total expenses exceed the 7.5% limit. The IRS also allows you to factor in common fees and services if they are not fully covered by your insurance plan, such as therapy and nursing services. In fact, the IRS' definition of medical expenses is fairly broad and can even include such items as acupuncture and smoking-cessation programs.
The Bottom Line
The slips of paper you cram into your wallet can mean more money in your bank account come tax season. Hold on to receipts for services, and keep a file throughout the year so you have a record of even the smallest expenses you incur for business, for charity and for your health. As those expenses add up, they can start to lower your tax bill.