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Making the Most of Those Deductions
By Linda Stern WASHINGTON (Reuters) - Income taxes are the price we pay for our civilization, as Oliver Wendell Holmes once said. But there's no point in going overboard. It's good to aim at paying what you're supposed to -- and not more. Some take that idea to excess. This week, federal
agents charged telecommunications entrepreneur Walter Anderson with tax evasion so extreme they say he once paid $494 in income taxes on over $125 million in annual earnings. He says he's not guilty, but it makes you think. Maybe you should redouble your efforts to find those extra deductions. Here are some suggestions for making the most of your tax returns without doing anything that brings federal
agents to your door. They won't point you to Anderson-like millions in deductions, but maybe they will help. Some of these provisions are new, and others are tried and true. -- The sales tax deduction is new. State and local sales taxes have gone ever higher, but that may be good news for tax filers who live in states with low or no income taxes. Starting with your 2004 return, you have the option of deducting what you've paid in sales taxes instead of income taxes. Find out exactly how much you are eligible for by checking the new IRS publication 600 (available, like a lot of other great free information, at http://www.irs.gov.) -- Higher gas prices pay off, too. The IRS raised the standard mileage rate to 37.5 cents a mile for business use of your car and 14 cents for healthcare related trips. -- It helps to know what everybody else is doing. Of course, you shouldn't base your deductions on anything other than what you actually spent in a particular category, but it's good to know what the average deductions are for your income level. There are two reasons for that. First, if your deductions are way out of line with others at your income level, you can be prepared for extra IRS scrutiny with receipts and other records. And if you see your deductions constantly coming in under average, that might be a sign that you could be deducting more. Check and make sure you're not incurring expenses, say for charity or medical bills, that you're forgetting to deduct. The most recent averages published are for the tax year 2002, according to CCH Inc., a tax research firm in Riverwoods, Illinois. For taxpayers who claimed between $50,000 and $100,000 in adjusted gross income in that year, the average deductions were $5,672 for medical expenses, $5,173 for taxes, $8,364 for interest and $2,530 for charity. -- Medical costs have to pile up to 7.5 percent of your adjusted gross income, but given all the medical costs that are deductible, you'd be surprised how fast you can get there. Get IRS Publication 502 for a litany that stretches from abortion, acupuncture and alcoholism treatment all the way past birth control pills, chiropractic and dental bills, contact lenses, LASIK surgery, lead-based paint removal and psychological counseling to wheelchairs, wigs (to replace illness-related hair loss), and, of course X-rays. Don't forget to include your health insurance premiums, too. There are many other often overlooked deductions, according to the Ernst & Young Tax Guide 2005, by Peter Bernstein, (CDS Books, $16.95) a handy little -- uh, make that huge -- book. They include points on
mortgages you've re
financed more than once, theft losses, union dues, continuing education expenses for workers, laundry services for business travelers, interest on student
loans, investment interest, and, for all those Texas hold 'em poker addicts: gambling losses. Teachers get a little bit of special appreciation: Their special write-off of $250 a year for supplies was set to run out in 2003 but has been extended through 2005. -- Keep your forms as clean as your intentions. The first thing the IRS does is spit out returns that have mistakes on them. Errors can delay your refund or pull it out of the pile for closer inspection. So check your math, and watch these new details this year: If you use your sticky label (as the IRS requests), you have to make sure you write in your Social Security number, as the agency has deleted those numbers from the labels to protect your privacy. And this year many paper filers will have new addresses to file to, so don't automatically send your return off to the same place you did last year. Finally, there's nothing new or clever about this advice, except that every year many people ignore it: Remember to sign your return.
Source: reuters.com