With the advent of online tax filing, many folks have taken on the burden of preparing and filing their own taxes. As you do this, you’ll want to make sure that you cover all of the bases with respect to the deductions that you’re allowed. Perhaps there will be one listed that you’ve overlooked, or didn’t even realize you could take!
Educator Expenses. If you’re a professional educator, you can deduct up to $250 worth of expenses you’ve incurred on books and classroom supplies. Don’t be daunted by the fact that there isn’t a place on the return for this deduction – Congress waited until it was too late last year before they extended this deduction, and the IRS forms were already finalized. The trick is to use line 23 on Form 1040, the one for Archer Medical Savings Account deductions, and write an “E” on the dots to the left of the “amount” column. If you’re also claiming the Archer MSA deduction, write a “B” (for both) on the dots, enter both amounts (totaled), and attach an explanatory breakdown of the two deductions to your return.
College Tuition. This one isn’t on the tax forms either. It’s allowable to deduct up to $4,000 that you paid in college tuition in 2006 for yourself, your spouse, or a dependent. This is helpful if you have a high enough income that you cannot take advantage of the Hope or Lifetime
Learning Credit. The trick to taking this deduction is to use line 35 of Form 1040, which is the line for domestic production deduction. Write the letter “T” on the dots to the left. If you’re also claiming the domestic production deduction, as before with the educator credit, write the letter “B” on the line and attach a breakdown of the expenses to your return.
Estate Tax Paid on Income in Respect of a Decedent (IRD). If you inherited an IRA from someone whose estate was large enough to be subject to the federal estate tax, you can use this deduction to keep from being double-taxed. What happens is, you get an income-tax deduction for the amount of estate tax paid on the balance. For example, if you inherited an IRA worth $200,000 that was subject to estate tax at the rate of 45%, so the tax amounted to $90,000 – paid from elsewhere in the estate. As you withdraw funds from the account, each withdrawal carries an IRD deduction of 45% - so if you took out $50,000, you’d get to deduct $22,500 from your tax return, so that you wouldn’t pay tax on that portion again. This deduction is taken on Schedule A as a miscellaneous deduction, not subject to the 2% floor.
Refinancing Points. When you refinance your home, quite often there are points paid on the loan. While you can deduct these all at once on the original purchase of a home, the rule is to deduct points on refinancing over the life of the loan. So, if you paid two points on a $200,000 15-year home refinancing, for a total of $4,000, you’re eligible to take a deduction of $267 each year of the loan. If you refinance again or sell the home, ending the loan early, in that year you’re allowed to deduct the remaining value of the points that you paid on that loan.
State Sales Taxes. This is yet another of the “last minute” extensions that made its way into the tax law for 2006 returns. As in recent years, you’re eligible to evaluate between state sales tax and state income tax for your deduction. Where this really pays off is if you’ve purchased a car (or two), or an RV, boat, or other big-ticket item. There is a formula based on your income to come up with the base amount of tax you’re allowed to consider, and you’d add to this the amounts you paid for the big-ticket item(s). For this deduction, use line 5 of Schedule A and write “ST” on the dotted line to the left.
