Say you've always filed for the standard deduction. The first year that you'll be better off filing for itemized deductions may sneak up on you. The IRS counts payments such as mortgage interest, charitable gifts, state taxes, and other expenses to reduce your tax liability.
If you calculate your deductions and still fall short, then you'll have to file the easy way again, but at least you'll have a better idea how much you might have to spend yearly to benefit from itemized deductions.
Many taxpayers may have overlooked some of the following deductions:
- State sales tax or state income tax
You have a choice between deducting state income taxes or state sales taxes. This means that if you suspect you bought some big-ticket items, you'll have to calculate whether you're better of deducting sales tax or income tax.
- Teaching aids
Qualified educators can deduct the expenditure on books and other teaching aids up to $250.
- Higher education expenses
If you don't qualify for the Hope or Lifetime Learning credit, you can deduct higher education expenses paid in 2006 up to $4,000 for yourself, your spouse, or your dependent(s).
- Student loan interest
Interest up to $2,500 on student loans can be deducted every year of the lifetime of the loan—even if paid by parents. This deduction is allowed only if your income is lower than $65,000 as a single person or $135,000 as a married couple.
- Charitable contributions
Contributions to charitable organizations are deductible. These contributions may be either cash or goods, such as clothing or appliances. The contributions-in-kind are valued at fair-market value. Out-of-pocket costs incurred while making charitable contributions during the year also qualify for deduction.
- Job search expenses
Expenses related to job searches, including cost of resumes, phone expenses, postage, career counseling, and travel to and from your interviews are deductible.
If you've moved more than 50 miles to get a job, you can deduct movers' costs. This cost of moving and traveling to the new area can be deducted even if it is not itemized.
- Childcare expenses
Your workplace may reimburse childcare expenses up to $5,000 through a tax-favored account, but you may also qualify for a tax credit for up to $6,000 spent on child care.
- Estate tax
If you inherit an IRA, you have to pay federal estate tax, but you can get a deduction for the amount of estate tax paid on the IRA balance.
- Previous year taxes
The taxes you owed when you filed for your 2005 state tax return can be included for deduction.
- Home refinance points
When you deduct points after refinancing a home, these points are deducted over the life of the loan (as opposed to all at once with a new purchase). This may be a small deduction if taken every year, but on sale or refinance these points are of substantial value if not deducted each year.
- Health insurance premiums
Health insurance and long-term care premiums are deductible based on your age, and if your medical costs exceed 7.5% of your income, additional health care costs become deductible.
- Disaster Area
The deduction of damages to house and property not covered by insurance is allowed if the area is declared a disaster area—through flood, ice storms, earthquakes, similar disasters, or theft during disaster.
