8 ways to save on your taxes
1 Deduct medical expenses on state taxes.
On your federal income tax return, you can deduct medical expenses (including health-insurance premiums) only when they exceed 7½ percent of your adjusted gross income. “But you can deduct these expenses on your New Jersey state return starting after just 2 percent of adjusted gross income,” says Barbara Christie, a certified financial planner with TFS Income Tax Services in Lincroft. “That’s a special reason to be sure to keep complete, accurate records for tax time, which you should be doing anyway.”
2 Fund an individual retirement account (IRA).
The law allows you to put money into a 2010 IRA until April 18, 2011. Adding to your IRA—if you’re sure you can afford it—can reduce your tax obligation. (The deductibility of IRA contributions is phased out at certain income levels if you’re an active participant in an employer-sponsored retirement-savings plan such as a 401K, but you may still qualify for a deduction—ask your tax preparer.) And if an IRA brokerage account charges you a management fee, says Christie, you can deduct that fee if you pay it by check, but not if it’s simply subtracted from your balance.
3 Deduct charitable expenses.
Most people know they can take a tax deduction for a check written to a charity. But they may
not realize they can also deduct other charitable expenses—for example, 14 cents per mile for driving to provide charitable volunteer services, such as delivering meals to the homebound.
4 Report first-time home buyer’s credits.
You’re probably aware that this credit was extended to include homes bought by May 1 of last year. But did you buy a first home in 2008? That year’s credit was temporary, and its 15-year repayment period began last year. A preparer who is new to you may not think to suggest it, but repayment is treated as a tax and should be reported on the “Other Taxes” section of Form 1040. Otherwise, you risk a penalty.
5 Deduct job-search expenses.
If you had to scramble for a new job in 2010’s tough economy, you’re not alone. However, while most relocating expenses for that new position aren’t deductible, expenses from the search itself are. Christie notes that they may include fees for consultants who help you prepare a resume, union dues, train and airplane fares, gas mileage, tolls and parking (but not, alas, that spiffy new suit for the interview). Enter these on Schedule A—even though it doesn’t specifically request them.
6 Report cancellation of debt.
In another sign of the times, some consumers are persuading credit-card companies and other creditors to resolve debts at a discount. To the government, this discounted portion is taxable income. Check the Form 1099-C you receive, make sure the figure for debt forgiven is correct, and report it on line 21 of your Form 1040 to avoid penalties and headaches later.
7 Claim education credits.
Did you pay tuition in 2010 for schooling for yourself or a family member? Claiming one of two tax credits on Form 8863 may offer relief. The American Opportunity Credit (AOC), which debuted in 2009, covers—for the first four years of post-secondary education—100 percent of the first $2,000 of qualified tuition or related expenses and 25 percent of the next $2,000, to a total credit of $2,500 per student. Then there’s the Lifetime Learning Credit, which covers 20 percent of the first $10,000 in tuition paid. Ask your tax preparer which education credit is better for you. Each is phased out at certain income levels, which are lower for the Lifetime Learning Credit, where phaseout begins at a household income of $100,000 for married couples filing jointly.
8 Report health savings account activity.
These accounts (not to be confused with flexible spending accounts) are offered by a growing number of employers to employees who choose health insurance plans with low premiums and high deductibles—they’re a way of putting money aside to pay medical expenses tax-free until you meet those deductibles. You can deduct contributions on your tax return. Check Form 1099-SA, which you’ll receive from the plan sponsor, and be sure to report contributions and distributions—or you’ll risk a fine.