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Looking for More Tax Deductions?

Your income: It doesn’t seem like the figure should be terribly complicated to calculate. Yet as April approaches we realize that, thanks to our tax system, a number of deductions can manipulate the amount of your taxable income. Depending on your write-offs, for instance, your taxable income could be anywhere from half to almost all of your gross income, says Tax Guy Bill Bischoff.

The biggest and most common deductions–home mortgage interest, charitable donations, and so on—leap to mind as soon as you get your hands on that Form 1040.  But there are several others, and some will catch you by surprise. Here are a few more that may have slipped below your radar.

1. Protective Clothing Required at Work. Need to buy your own lab coat? Apron? If you’re required to wear it at work, and the item isn’t provided by your employer, then it’s deductible, says Greg Rosica, tax partner at Ernst & Young and contributing author of the “Ernst & Young Tax Guide.” This deduction even applies to cosmetics and related application tools for makeup artists and beauticians. But don’t get too carried away. Just because your employer requires you wear a suit to work, doesn’t mean the IRS will let you deduct the cost of that Hugo Boss hanging in your closet.  If you’d otherwise wear the item in your everyday life–say to dinner, to church, to visit your mother-in-law–then it doesn’t pass the test, says Rosica.

2. State and Local Sales Tax. This primarily targets residents of states like Texas, Washington and Florida that don’t have state income taxes. The IRS provides estimated sales-tax tables based on income — but if you bought any big ticket items (say, a car or a boat), you may want to keep track of the items yourself. Lawmakers extended this deduction for 2010 and 2011.

3. Childbirth Preparation Classes. If they’re part of your obstetrical care, those Lamaze courses can qualify as a deductible medical expense. Other commonly missed qualifying medical expenses: prescription contraceptives, alcohol- and drug-abuse treatments, contact lenses and hearing devices. Bear in mind, though, that unless your medical expenses exceed 7.5% of your adjusted gross income (AGI) you won’t get any benefit from these deductions, says Rosica. So, it’s probably a good idea (if you can) to load up on pricier medical expenses during the span of one year.

4. Energy-Efficient Home Improvements. Let’s hope the tree hugger in you spent those energy-efficient dollars during 2010. For 2010 only, you’re entitled to a 30% credit of up to $1,500 — next year it’ll be a 10% credit for up to $500.

5.  Job-Search Expenses. Just because you got a pink slip doesn’t mean you’re entirely out of luck.  You can deduct job-search expenses as part of your miscellaneous itemized deductions, which—as a whole—are deductible if they exceed 2% of your adjusted gross income, says Dustin Stamper, manager of the Washington national tax office at Grant Thornton LLP. These can range from resume-printing costs to headhunter fees.  Keep in mind that you can’t deduct expenses if you’re searching for your first job, or if you’re new to a field.

And there are many more.  Take a look at Ernst & Young’s “50 Most Commonly Overlooked Deductions” for a comprehensive roundup.

Some taxpayers gripe that in a system rife with deductions, exclusions, and credits, high-income earners can maneuver their wealth to limit tax liabilities. Indeed some breaks teeter in favor of the wealthy: the larger your home, the larger your mortgage, the bigger your home-mortgage-interest deduction in a tax bracket where it counts, says Kail Padgitt, an economist at the Tax Foundation, a D.C.-based nonpartisan tax research group. And then there’s the highly subjective definition of charitable donations. “Are donations as a board member of the opera different than donating to a soup kitchen?” asks Padgitt. Some would say yes, but the IRS isn’t among them.

Before we start pointing fingers, though, we should consider the fact that the wealthy fork over a hefty share of the money that Uncle Sam collects each April. In 2008, the top 1% of tax returns paid 38% of all federal individual income taxes, according to a Tax Foundation report. http://www.taxfoundation.org/news/show/250.html

Readers, do you think deductions contribute to an overly complicated tax code, one that enables filers to duck their tax liabilities? Do you find such deductions tend to favor the wealthy?

 

 

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About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.

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