Thinking of Itemizing your Tax Deductions? Here’s a Teaser

January 28, 2010 by G.E. Miller
Filed under Saving Tips, The Hotness

Itemizing your Taxes Made Easier

If you’re like me, you’re probably still waiting around for all your income statements to trickle in from banks, discount brokers, your employer, and anyone else whom you might have some sort of financial interest with.

The part that is more in your control is the organization of your deductions. If you’re not sure whether or not itemizing your taxes is right for you, you may want to visit IRS Form 1040 (Schedules A&B). What follows will be a teaser on what you could potentially itemize and how to organize your tax deductible expenses throughout the year.

Passing on the Standard Tax Deduction

I’m one of those 35-40% of Americans who doesn’t take the standard deduction, and it has paid off the last 3 years. I get disturbingly excited about being able to itemize my taxes. However, in doing so, I’m quickly finding that with each passing year, preparing for my tax return keeps getting progressively difficult.

I’ve always used tax software, such as Turbotax and H&R Block, however, knowing all the ins and outs of what deductions I can claim, what losses I can write off, and the ins/outs of self-employment deductions has become increasingly difficult. Preparation is key.

A List of Tax Deductions by Category

Itemizing your taxes can be fairly straightforward – but much more so if you prepare year round. I have a simple way of dealing with tax documents in lieu of itemizing that has worked for me over the years. I’d recommend grabbing some manila folders and labeling them. Here’s how I group tax related paperwork for deductions:

1. Investment Loss Deductions

This includes losses from mutual funds, stocks, and other investments. If you get electronic statements from your online brokers, you may actually need to go into your account online and print off your 1099-B tax forms.

2. Charitable Donation Deductions

If you have record of a gift that you gave to a 501(c)(3), hold onto them. Also, you may be able to deduct mileage and other expenses from volunteering your time and efforts for a non-profit. Here’s complete documentation on IRS deductible charitable donations.

3. Real Estate Expense Deductions

If you own a home, you’ll need a copy of your tax bill or a statement from your escrow company on how much in property taxes you paid over the year. Those with mortgages will need a 1098 from their mortgage provider. Those lucky enough to claim the first-time homebuyer credit will need to attach IRS Form 5405. Also, don’t forget home energy improvement credits.

4. Education Expense Deductions

Education deductions include interest paid on student loans (IRS Form 1098-E), college expenses (books, travel, etc.).

5. Family Expense Deductions

Have a family? You probably need some deductions these days. Deductible expenses include child and dependent care expenses, adoption expenses, child tax credits, and earned income credits.

6. Personal Property & Vehicle Deductions

In this category you can lump in any vehicle registration fees, personal property taxes paid, and credits from electric or other IRS qualified hybrid vehicles.

7. Medical & Dental Expense Deductions

You can deduct medical and dental expense in your taxes if they exceed 7.5% of your gross AGI. These expenses can include medical bills, prescriptions costs, medical equipment costs, insurance premiums, and miles driven for medical purpose. Payments to HSA’s are also tax deductible if you itemize, regardless if you hit the 7.5% on other medical expenses.

8. Retirement & Investment Expense Deductions

Getting money back for investing is great! Traditional & SEP IRA contributions are tax deductible. Your 401(k) and 403(b) contributions should already be factored in through payroll and your W2. Also, if you’re under certain income thresholds, you may be able to claim the Retirement Savings Contribution Credit.

9. Employment Expense Deductions

Eligible employment expenses includes anything work-related that comes out of your pocket, basically – gas mileage, food, travel, clothing, software, hardware, etc. Self-employment expenses get a little more complex, so I won’t cover it in this post, but stay tuned for more down the road in this area. Also included is any expenses related to applying and interviewing for a job. Check out IRS Publication 529 for more.

Itemizing your tax deductions isn’t the easiest or most enjoyable thing in the world to do, but it can potentially pay huge dividends for you.

Reader Tax Deduction Discussion:

Are you itemizing your taxes this year? Take the poll!
Would you add any major buckets of deductions to this list?
How long have you been itemizing?
Do you get excited about itemizing your taxes?

Note: There is a poll embedded within this post, please visit the site to participate in this post's poll.
Don’t Miss Out on Free 20SomethingFinance Content Updates!