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We all like tax breaks. With a tax code as massive as ours, there are plenty of tax breaks — if you know where to look. Indeed, you might be surprised at the sorts of things that will get you a tax break, from moving a significant distance to refinancing your home to buying a new chair for your home office.
Deductions, which lower your taxable income, can be quite helpful in saving you money. These are items that you paid for, and that government allows you to subtract from your income so that your taxable income is lower. Last year, my deductions kept me from being in a higher tax bracket. This year, I probably won’t be so lucky, but the tax deductions I take will lower my taxable income by close to $20,000, and that will make something of a difference in the final outcome.
It is important, though, not to get too carried away with your tax deductions. It can be tempting to count every little thing, but it pays to be wary of the deductions you take. Here are some of the common pitfalls associated with taking tax deductions:
- Home business expenses: Yes, there are home office tax deductions that you can take. However, these expenses much considered solely business expenses, and “necessary” for your business. The 3-in-1 printer is probably a must for your business. That fancy new coffee machine? Not so much. Make sure your home business deductions are, in fact, for business.
- “Time donation” to charity: Many people assume that they can deduct their hourly rate if they volunteer their professional services. Not so. It’s a nice thought, but not deductible. You can deduct donations of money and goods, and you can even deduct mileage you drove in service of a charity. But you do need to have proper documentation of your goods and cash donations, and your charity connected driving, in order to deduct.
- Paying others’ expenses: There are those who try to pad their expense deductions (for business travel, etc.) by paying others’ expenses as well. The IRS does not look favorably on this practice. So, before you pick up the tab, remember that you can still only deduct your expenses.
- Turning down a reimbursement in order to deduct it: This is a big no-no. The IRS makes it very clear that you can deduct expenses that have not been reimbursed and that are not reimbursable. This means that if your company offers to reimburse you, you had better take it. Because if it’s a reimbursable expense, the IRS won’t allow you to deduct it from your taxable income.
- Medical expenses that have been paid: There is a place to deduct medical expenses. But, again, this ends up as a situation in which you have not been reimbursed for. If other sources or insurance companies pay the expenses — to you or to the health care provider — you cannot deduct them. Now, if you have a home business, and you pay heath insurance premiums through this home business, you can deduct a portion of the premiums you pay.
You want to get what you can in terms of tax efficiency, but it’s good to be sure. You can do this at the IRS web site, or you can contact a trusted tax professional. Before you deduct, double check to make sure that you are completely eligible for the deduction, and that you have proper documentation to back up your claim in case the IRS audits you.