Much tax advice focuses on deductions and making the most of them. Some take the standard deduction, but others decide to itemize. The list of itemized deductions is myriad. Some have thresholds to satisfy before the deduction applies. Receipts or other documentation is essential to support deductions. While a complete list and details are available online at www.irs.gov or through your tax preparer, here are some of the most common deductible expenses:
- Real estate, or property, interest.
- State and local income or sales taxes.
- Certain health care costs.
- Certain job-related expenses not reimbursed by your employer and that exceed 2 percent of your adjusted gross income.
- Charitable contributions. The deductibility generally is limited to 50 percent of your adjusted gross income, but in certain cases, a lower percentage applies.
A new charitable contribution is available for 2006 and 2007 for taxpayers 70.5 years old and older. If eligible, you can transfer up to $100,000 from a traditional IRA to a qualified charity tax free. The direct transfer can lower or eliminate the taxation of the required minimum distribution — the amount required to be distributed once you are 70.5 years old. In addition, this contribution does not count against the normal charitable deduction limit. Many IRA providers have cut-off dates for fulfilling your request — some may be as early as Dec. 15.
Donation of a used automobile may yield a larger deduction if the charity uses the vehicle in its work rather than selling it. You may want to check with the charity to see how it plans to use the vehicle. Contributions of clothing and household items made after Aug. 17, 2006, are not deductible unless the property is in good used condition or better.
- Home-office deductions. IRS Tax Tip 2006-53 indicates that there are additional requirements for employees who want to take a home-office deduction. This is one area of increased IRS scrutiny, so do your homework before taking a home-office deduction.
Generally, you want to itemize deductions when the total is greater than the standard deduction, but there are times when itemizing is appropriate even if the standard deduction is greater. If the Alternative Minimum Tax (AMT) would increase your taxes, here are some itemized deductions that are deductible for AMT purposes:
- Medical expenses in excess of 10 percent of your adjusted gross income.
- Charitable contributions.
- Qualified residence interest.
Note that items such as state and local income taxes, real property taxes and miscellaneous itemized deductions are not deductible for AMT purposes.
If your total itemized deductions are slightly less than the standard deduction, you still may be able to itemize deductions and save on taxes by using the bunching approach. By accelerating some deductions from 2007 into 2006, you may be able to itemize. This may be beneficial if your 2006 taxable income is higher than usual.
Here are some acceleration options:
- Increase charitable contributions by contributing all or a portion of your 2007 tithe by year-end.
- Pay 2007 state income tax and local property tax a little early.
- Make an additional mortgage payment before the end of 2006.
EDITOR’S NOTE: This educational information is not intended as legal or tax advice. Individuals with legal or tax questions should consult a legal or tax adviser who can provide specific information to their unique situations.
Sherre Stephens is a certified employee benefits specialist and director of executive and institutional benefit design for GuideStone Financial Resources of the Southern Baptist Convention.
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