Many of us are careful to take every allowable tax deduction when we prepare our tax returns. It is easy to overlook even some of the most common deductions. If your record-keeping throughout the year is disorganized, or if you forget to tell your tax preparer all they need to know, you may forfeit some tax savings. These guidelines will help you to avoid an unfortunate situation.
A tax deduction is an expense that you incur as a taxpayer that the Internal Revenue Service (IRS) allows you to use to lower your taxable income. For example, if you spend $200 on stationery that is used in your business to generate income, the IRS allows you to deduct that $200 as a business expense. That expense -- plus numerous other allowable deductions -- can reduce your taxable income substantially.
Home ownership offers some of the best tax deductions you can take. The interest you pay on your home mortgage loan is a tax-deductible item. If you bought a home, the points you paid at the closing are also tax-deductible. If you have a home equity loan and you use it to make home improvements, the interest on those payments is a tax deduction. Real estate taxes are deductible as well. Deductions on the cost of owning a home can be taken when you itemize your deductions using Schedule A along with your 1040 tax form.
If you are paying off student loans, you should receive a Form 1098 indicating how much interest you paid in a calendar year. A portion of that interest is deductible if your income is within certain limits. Also, state and local income taxes are deductible on your federal return. See how much you paid in state and local taxes on the W-2 form that you receive from your employer.
If you contribute to charitable organizations, you may deduct those donations if you use Schedule A to itemize your deductions. Careful recordkeeping is important as the IRS has become stricter in its requirements for documentation of charitable deductions. Medical expenses are also deductible, but they must amount to more than 7 1/2 percent of your adjusted gross income. Miscellaneous costs such as employee expenses for uniforms or union dues are deductible if they total more than 2 percent of your adjusted gross income. Other miscellaneous deductions include tax preparation fees and tuition for courses your employer requires you to take.
Determine whether it is to your advantage to itemize your deductions or to take the standard deduction offered by the IRS. The standard deduction for a single person is $5,950 and for a married couple is $11,900 in the 2012 tax year. You only want to itemize your deductions if they add up to more than your allowable standard deduction.