The new year is upon us, which means tax season is here and you need to start planning your 2011 return. This time of the year brings with it a fair amount of anxiety as people begin to scribble down their write-offs in hopes of reaping the benefits of a larger return. Confusion over tax deductions is fairly common in the lead-up to the April deadline, and while there are always going to be some gray areas, there are a few categories of deductions that you can rely on to reduce the money you owe to the IRS or to increase the money you will get back:
Itemized deductionsâ€”Itemized deductions can include personal deductions as well as some business or investment expenses. Taxpayers are allowed to deduct a certain number of person allowances, such as medical and dental expenses (including costs related to diagnosis, cure, treatment and prevention). Health care premium costs, as well as the fees incurred by visiting physicians, surgeons, dentists, or most other medical practitioners. Other personal allowances include interest expense on home loans, gifts, or donations made to charities.
If you donate property to a charitable organization you qualify for a fair market value deduction, although cash is the easiest form of donation to legally prove. Keep in mind that your charitable donation is restricted to anywhere from 20-50% of your adjusted gross income. More deductible personal allowances include losses as the result of casualty or theft, retirement or health savings plans, and educational expenses.
Depreciationâ€”Taxpayers are allowed to deduct a certain amount from the annual taxes based on properties they own, most notably real estate and vehicles. A deduction for real estate tax for most any property is allowed as long as you are assessing the true value of the proposed property and not additional local improvements.
The Small Business Jobs Act of 2010 also made certain privately owned buildings subject to deduction. Vehicles are allowed as a deduction as a way to facilitate self-employed people getting to and from places of business. Both luxury and passenger automobiles are included, although there are limitations on both if they have not been utilized for business. Obviously, it would difficult for the IRS to prove your vehicle was not used for business.
Home office deductionsâ€”Deductions made for the use of a part of your home as a business office are common, although there are some misconceptions afoot. The taxpayer looking to make this deduction must be sure that the home office is not used for anything else. For example, if you do business on the same table you play poker on every night, this table cannot be deducted, although again one would have to wonder how the IRS is going to substantiate that this deduction isn’t legitimate.
A home daycare business and the storing of business inventory at home are the exceptions to this caveat. Another stipulation is that the home office is used consistently for business. To be on the safe side, make sure your home office is where you complete administrative jobs and meet with clients on a daily basis. You can also write off the equipment used in your home office, although again we get into the tricky territory of when business appliances cross over into personal appliances. In general, expect to be able to write off most equipment that is used on a regular basis for mostly business needs, such as your home office phone, printer, computer, and some of the corresponding utility bills.
Home Mortgage interest deductionâ€”In most cases you can make a tax deduction based on the loan you acquired on your home. This can include a second mortgage, a credit line, or a home equity loan. There are several limitations, which are that the taxpayer must choose itemized deductions, the interest must have been paid on a principal or second residence, and interest is only deductible on the first $1 million of debt. There are multiple other tax incentives for home ownership, but mortgage interest deductions have been limited since the Tax Reform Act of 1986.
These aren’t the only deductions available to taxpayers, just the most common ones that are used consistently to help save money come tax season. Each person’s situation is different, especially when self-employment, real estate, and stock investments are involved.
-Alex Summers is a frequent contributor to small business sites and franchise sites such as those belonging to Kansas City orÂ Columbia storage units