Each year Americans overpay their income taxes by $400 due to missed tax breaks and savings incentives, according to H&R Block.
Whether you file your taxes yourself or hire someone to do it for you, be aware of tax law changes and be sure you’re not paying more than required by law. Here are some tax tips as well as a few common, but often overlooked, deductions your family may qualify for this year:
• State and local sales tax vs. income tax. If you live in a state with no state or local income tax, you can deduct the general sales tax you paid in 2005 from your federal tax return. If you do pay state/local taxes, you can either deduct the state/local taxes you paid or what you paid in sales tax for general purchases, whichever is greater. So if your purchases were high and your state/local taxes are low, you may choose to deduct your sales tax.
• Charitable donations. You can deduct the value of items or money given to churches and other 501C-3 non-profit organizations. Get receipts for donations of more than $75 when goods or services were exchanged, or if more than $250 was donated and no goods were received.
• Retirement. You have until April 15 to make a tax-deductible contribution to a traditional Individual Retirement Account (IRA). For tax year 2005, the maximum IRA contribution that can be deducted is $4,000 ($4,500 if you’re age 50 or older). This is a good way to save for the future and lower your taxes at the same time.
• Education expenses. You can receive tax-free distributions from Coverdell Education Savings Accounts, or ESAs, and Qualified Tuition Plans, known as QTPs. The main attraction for these programs is the same that draws you to a qualifying retirement account: distributions from ESAs and QTPs are tax-free when withdrawn and used for your child’s education.
• Disaster or theft. If your home was damaged by flood, ice storm, earthquake, other natural disaster or thieves, you may be able to deduct what your insurance doesn’t cover.
• Real estate. Your mortgage interest is deductible, and if you refinanced this year, you may be eligible to deduct some costs associated with the loan.
• Medical expenses. You can deduct medical expenses if your bills exceeded 7.5 percent of your adjusted gross income. Medical expenses that can be itemized include the cost of medical insurance, prescriptions, out-of-pocket medical expenses, and mileage to and from medical facilities.
• Job-related expenses. Out-of-pocket job expenses not reimbursed by employers are deductible. And if you were job hunting, you can deduct most expenses related to the search, including the cost of resumes, phone expenses, postage, career counseling, and travel to and from interviews.
• Stock losses. You can use stock losses to offset taxes owed on stock gains in a given tax year. If the losses exceed the gains, you can use up to $3,000 in losses to offset ordinary income.
• Tax preparation. Sometimes it pays to hire someone to prepare your taxes. You can claim the cost of tax preparation software or the cost of hiring a professional.
• Claim the right withholding. While it may seem like a windfall to get a large tax refund, your goal should really be to break even. If you’re getting a refund, you’ve basically been loaning the government money—without interest. To strike the right balance, fill out a new Form W-4 with your employer to have the proper amount of taxes withheld from each paycheck.
• Organize your records. Keep a file of receipts, pay stubs and various financial forms so that, by the end of the year, it’s easier to retrieve the numbers you need to file your tax return. This includes general financial documents, receipts for deductible items, insurance and medical records, theft or loss documentation, charitable records and self-employment records.
Though following these tips can save you money, every family’s financial situation is different. Check with your financial or tax adviser to clarify these suggestions or if you have specific questions. You also can get information from the IRS website, www.irs.gov, or helpline at (800) 829-1040.