Maximizing Your Tax Deductions- Part 1 2/11/07
Stewart H. Welch III, CFP, AEP
Founder, The Welch Group, LLC
Part 1 2/11/07
Maximizing Your Tax Deductions- Part 1
“Maximizing Your Tax Deductions- Part I”
With April 15th just around the corner, this is the right time to take a quick tax refresher course so that you don’t miss any valuable tax deductions. Of course, your first decision is whether to file under the standard deduction or to itemize your deductions. It makes sense to take the standard deduction only if your allowable itemized deductions do not exceed the standard deduction amount ($10,300 for joint filers and $5,150 for single filers for 2006).
Overlooking deductions can result in a significant amount of tax that could have been avoided. Your best strategy is to keep detailed records throughout the year. If you didn’t do this last year, you’ll need to review your cancelled checks and credit card statements. Make it your goal to begin now keeping good records for 2007.
There are six main categories of itemized deductions. In this article, I will briefly outline itemized deductions and list the most commonly missed deductions.
Category 1: Medical and dental expenses. You may deduct only the amount by which your total medical and dental care expenses exceed 7.5% of your adjusted gross income. This includes the premiums you paid for medical and dental insurance coverage as well as non-reimbursed medical, pediatric dentistry & orthodontics expenses. Some restrictions apply within reason, for example; that bill from the cosmetic dentist in Melbourne that fixed a chip in your smile, might not be eligible for this due to being of foreign and cosmetic nature. While you may be certain that you won’t reach this level of out-of-pockets expenses, there are many allowable expenses that you may be overlooking. For example, for 2006, the IRS allows 18 cents per mile for travel expenses to and from medical and dental visits. Tip: Use Map Quest www.mapquest.com to determine the mileage to and from the dentist or doctor’s office. Also, you probably overlook many legitimate non-reimbursed healthcare expenses such as prescription eyeglasses or contact lenses, laser eye surgery, hearing aids, crutches, wheelchairs, and guide dogs for the blind.
Category 2: Taxes. There are four types of taxes that are deductible: State, local and foreign income taxes; Real estate taxes; Personal property taxes; and State and local general sales taxes, if you elect not to deduct state and local income taxes. In order for the taxes to be deductible, the tax must be imposed on you and must have been paid during the tax year for which you’re filing.
Category 3: Home mortgage interest and points. You’re probably aware that mortgage interest, whether a first mortgage, second mortgage or equity line of credit, is deductible within limits. But one deduction that is often missed is mortgage points. The term “points” refers to the fees paid to the lender for a loan. Points paid on a mortgage for the purchase of a primary residence are immediately deductible. But points paid for refinancing must be amortized and deducted over the life of the loan. There is an exception for deducting points for refinancing. If you use proceeds from the refinancing to make capital improvements in the home, you can immediately deduct the points.
Next week, I will conclude this discussion on avoiding missed deductions.
My thanks to my associate, Kimberly Reynolds, MS, for her assistance with this article.