Step 4: Itemized Deductions
When you start getting into itemizing your life can be simple or complicated depending on your situation. For most people it is just reporting mortgage interest and taxes, but if you are itemizing you might want to at least think about the rest of the deductions available and if they would benefit you.
Medical deductions have a 7.5% Adjusted Gross Income (AGI) floor. AGI is the money you got from all sources minus a few "above the line" deductions that I'm not going to get into now. And a "floor" means that you don't get a dollar below that amount as a deduction. Anyways take a look at your AGI and then multiply it by .075 and then take a look at your expenses and see if you have more medical bills than that. Basically unless you have been extremely sick this last year and paid a huge amount out of pocket for medical care it's unlikely that you will have more than this amount and it won't be worth digging through every receipt to find out you just wasted hours of your time on a deduction you won't get a dollar for.
Charitable contributions are deductible- with certain limitations. The main thing is to make sure that the company you are donating them to is a charity registered with the IRS and get receipts even for small donations. For non-cash contributions it gets more complicated- don't trust those charitable contribution estimators that software like TurboTax has built in- the IRS hasn't approved that as a way to estimate the value of your goods and it over-values items in my opinion! For clothes and household items you have to know approx. how much you paid for the items, then I usually use an estimated value of what the thrift store would sell them for as a contribution amount. The more detailed of a receipt you can get from the organization the better- pictures and itemized lists of what you are donating help too. Sure you know exactly what you gave away now- but would you remember every item three years from now if the IRS asks you to document it?
Donating large items like cars gets more complicated- this used to be a great tax deduction but the IRS has closed the loophole on this in recent years and you cannot write off the bluebook value of the vehicle unless very specific conditions are met! This gets very complicated and I have a lot of info about it here: http://crystalcleartax.com/le-propertycharity.php if you want to read more about it.
Gambling losses are only deductible to the amount of gambling winnings- so don't put a higher amount down even if your losses are higher- you will get audited for that one guaranteed. FYI most of the gamblers I've known belong to those "player clubs" type of things that the casinos run. If you do get a big win go and ask them for a breakdown of your losses that year so you have a record, they are more than willing to help out their regular gamblers. Oh and one more thing- losses and gains only average out each year so losing money for twenty years and then hitting the big jackpot, well those twenty years of losses didn't help you worth zip- just one reason gambling on the stock market can be more tax friendly than gambling in Vegas, although recently the stock market's odds probably wouldn't beat any casino.
Employee expenses- these can add up quick but you have to be careful not to take too much off or you will have to substantiate it in an audit- probably not something you're looking forward to. So my advice here is to be conservative on how much you use as a deduction, especially when it comes to auto expenses. As a rule of thumb my personal opinion is that it starts seeming questionable if employee expenses are more than 10% of your wages from that job. When someone brings me higher expenses than that I raise an eyebrow because I know realistically that most people just don't spend that much on their jobs- with one big exception: salespeople.
If you work in sales you probably have very high employee business expenses and because there is a high likelihood these will trigger an audit you need to stay on top of documenting your expenses and I would highly recommend you hire a competent accountant used to working with salespeople to file your returns.
Whatever your occupation, be sure to ask about home office deductions- often you need to have a home office in order to make your auto expenses deductible, otherwise they are considered commuting expenses. Commuting is never considered deductible. A home office has a whole bunch of rules it needs to fit into to qualify- i.e. it can't be the room that you watch tv and hang out with your pals on the weekends, unless that is specifically part of your job....
Medical deductions have a 7.5% Adjusted Gross Income (AGI) floor. AGI is the money you got from all sources minus a few "above the line" deductions that I'm not going to get into now. And a "floor" means that you don't get a dollar below that amount as a deduction. Anyways take a look at your AGI and then multiply it by .075 and then take a look at your expenses and see if you have more medical bills than that. Basically unless you have been extremely sick this last year and paid a huge amount out of pocket for medical care it's unlikely that you will have more than this amount and it won't be worth digging through every receipt to find out you just wasted hours of your time on a deduction you won't get a dollar for.
Charitable contributions are deductible- with certain limitations. The main thing is to make sure that the company you are donating them to is a charity registered with the IRS and get receipts even for small donations. For non-cash contributions it gets more complicated- don't trust those charitable contribution estimators that software like TurboTax has built in- the IRS hasn't approved that as a way to estimate the value of your goods and it over-values items in my opinion! For clothes and household items you have to know approx. how much you paid for the items, then I usually use an estimated value of what the thrift store would sell them for as a contribution amount. The more detailed of a receipt you can get from the organization the better- pictures and itemized lists of what you are donating help too. Sure you know exactly what you gave away now- but would you remember every item three years from now if the IRS asks you to document it?
Donating large items like cars gets more complicated- this used to be a great tax deduction but the IRS has closed the loophole on this in recent years and you cannot write off the bluebook value of the vehicle unless very specific conditions are met! This gets very complicated and I have a lot of info about it here: http://crystalcleartax.com/le-propertycharity.php if you want to read more about it.
Gambling losses are only deductible to the amount of gambling winnings- so don't put a higher amount down even if your losses are higher- you will get audited for that one guaranteed. FYI most of the gamblers I've known belong to those "player clubs" type of things that the casinos run. If you do get a big win go and ask them for a breakdown of your losses that year so you have a record, they are more than willing to help out their regular gamblers. Oh and one more thing- losses and gains only average out each year so losing money for twenty years and then hitting the big jackpot, well those twenty years of losses didn't help you worth zip- just one reason gambling on the stock market can be more tax friendly than gambling in Vegas, although recently the stock market's odds probably wouldn't beat any casino.
Employee expenses- these can add up quick but you have to be careful not to take too much off or you will have to substantiate it in an audit- probably not something you're looking forward to. So my advice here is to be conservative on how much you use as a deduction, especially when it comes to auto expenses. As a rule of thumb my personal opinion is that it starts seeming questionable if employee expenses are more than 10% of your wages from that job. When someone brings me higher expenses than that I raise an eyebrow because I know realistically that most people just don't spend that much on their jobs- with one big exception: salespeople.
If you work in sales you probably have very high employee business expenses and because there is a high likelihood these will trigger an audit you need to stay on top of documenting your expenses and I would highly recommend you hire a competent accountant used to working with salespeople to file your returns.
Whatever your occupation, be sure to ask about home office deductions- often you need to have a home office in order to make your auto expenses deductible, otherwise they are considered commuting expenses. Commuting is never considered deductible. A home office has a whole bunch of rules it needs to fit into to qualify- i.e. it can't be the room that you watch tv and hang out with your pals on the weekends, unless that is specifically part of your job....
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