Tip of the Month for February 2006
TIP: Don’t Miss Out on Tax Breaks
It’s time to start thinking about your personal income taxes...and your deductions for 2005. Without a little planning and forethought, it is easy to overlook a tax break or to short-change yourself. Here is a list of the top 5 deductions that taxpayers tend to forget.
- Non-cash charitable donations.
Keep track of all the furniture, clothes, appliances, etc. that you have donated to non- profits and charitable causes. Get receipts for all your donations. Most organizations leave it to you to determine the market value of the items you’ve given. If you’re not sure of their value, just check out the nearest Goodwill store and check some price tags. If you’ve made a non-cash donation and have forgotten to get a receipt, you can decide to take the deduction anyway. But, remember, the deduction will not be allowed, without a receipt to back it up, in the event the Internal Revenue Service (IRS) audits you.
- Health insurance premiums
If you are self-employed, and don’t have any other employer-paid coverage, you can deduct 100 percent of your health insurance premiums above the line. This means that the expenses are included in adjusted gross income and are not included with itemized deductions.
- Clean fuel deduction
You may be eligible for an above the line deduction of up to $2,000 on your 2005 tax return if you purchased a clean fuel vehicle— - one that uses a significant source of energy other than gasoline. Hybrid cars qualify for this deduction. The tax break is slated to decrease to $1,500 in 2006 and will disappear thereafter unless Congress renews it. The deduction applies in the year you begin to use the car - and you must be the original owner.
Note: The IRS has allotted tax credits in 2006 to buyers of a range of hybrid models including Toyota’s Prius and Highlander SUV, Honda’s Civic Hybrid and its Insight Hybrid, and Ford’s hybrid Escape SUV. The tax credit amounts vary depending upon the vehicle. If you are planning a purchase in 2006, contact your tax advisor for more information.
- Investment and tax expenses
This is an area where a lot of taxpayers shortchange themselves. To qualify, the total expenses must exceed 2 percent of your adjusted gross income before you get any tax benefit. There are a lot of expenses that fall into this category, and it’s easy to overlook something. Eligible expenses include: tax preparation fees and tax advice related to the tax aspects of estate planning, safety deposit box fees, annual brokerage fees, and investment publications like Barron’s or Investor’s Business Daily.
Maybe you are one of the many homeowners who took the opportunity to refinance your home. Any points you pay to refinance may be deducted on a monthly basis over the life of the new loan. Also, if you have refinanced more than once, all unamortized points on your old refinancing are deducted in the year of the new refinancing. The constant revisions to tax laws make it easy to overlook something. Contact your personal tax advisor to make sure you get all the tax breaks you deserve.