Getting all the Tax Breaks you have Coming

A surprising number of Americans pay too much tax by not taking advantage of legitimate tax breaks to which they are entitled. And what's more, most Americans are giving Uncle Sam a tax-free loan by setting their paycheck withholding too high.

Of course, it's nice to get a big tax return check--but remember, that was your money to begin with. Having too much withheld out of your weekly checks, only to get it back after a year without interest, is foolhardy when you could be using that money to generate income in an interest-bearing account or other investment. Set your withholding at the proper amount, don't request extra to be withheld unless you expect to have other income you will have to pay taxes on.

Of course, everyone knows about the mortgage interest deduction, one of the most sacred cows of all. But don't forget, in addition to the interest, you may also deduct "points" the mortgage lender charges you when you obtain the mortgage. Similarly, prepayment penalties are deductible, as are moving costs if you move to take a new job.

Medical expenses are deductible only for those that exceed 7.5 percent of your adjusted gross income, but there's a way around that called a Health Savings Account. This is a special account you purchase along with a high-deductible health insurance policy, and the pre-tax money you put into this account is all tax deductible, without regard to the 7.5 percent rule.

Don't forget business travel. If you drive your car for business, keep a mileage log. At the end of the year, this can add up to a sizeable deduction. And if you work at home, don't forget you can take a deduction for the part of your home that you dedicate to your work space.

When tax time comes, don't assume that you can't file the long form. It will take more time, but calculate your tax bill using both short form and long form. And if you're an investor, there's a whole category of items you can write off, including investment fees, and even subscriptions and journals that relate to your investment activity. If you buy stocks "on the margin," the interest you pay may be deductible.

Most of us too are drowning in credit card debt, and credit card interest is no longer tax deductible. Convert that credit card debt into a home equity loan and you can deduct the interest. And if you're out of work, job-hunting expenses are deductible, so keep track of the money you spend on resumes and postage, travel to interviews, or even schmoozing someone at lunch to get job leads.

There are also some deductions available that the government has created to encourage certain industries or types of behavior. Consider buying a "hybrid" gas/electric automobile, and take a hefty tax deduction.

Tax planning advice is almost always good, and professionals can verify the validity of your deductions for you and probably come up with more. And the money you pay to your tax professional is also deductible.

  

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