Some Obscure Tax Deductions You Might've Missed

Have you already done your taxes? I'm actually waiting a bit. I read somewhere that you want to file sometime in late February or early March....less chance of getting audited. The early filers and later filers have a bigger chance of being snagged. But hey, if you have all your ducks in line and are organized, you shouldn't worry about that, right?

So, I've got all my paperwork in a folder. I like to have all the W-2s, 1099s and that kind of paperwork on one side, and the paperwork backing up my deductions and credits on the other side. I list each company we should be getting a document from on the front of the folder on a sticky note, and check them off as they roll in. Don't forget that CD you might've closed early last year or any receipts you are planning on using as deductions. Get out your statement from your church, your Goodwill receipts and the like. That got me thinking, are there any new deductions this year? Are there some, as a military spouse, I should be looking at more carefully? I don't like to take the standard deduction, because I can always deduct more if I itemize. But don't go "deduction crazy" because deductions over the "normal averages" can trigger an audit. You can check here to see the latest averages available. I recently read through J.K. Lasser's 1001 Deductions and Tax Breaks for 2008 and came up with a few gems to share. Here are some deductions I might've missed.

• Interest on US Savings Bonds. If you put this money in a 529 or Coverdell college savings plan, or use it to pay for college, you are not taxed on the interest, as long as your modified adjusted gross income is below a set amount. Now I finally have a good use for those miserable, waste-of-money savings bonds we've been gifted every Christmas since the kids were born. I'll just cash the mature ones and stick that money into the kids' 529s. The only catch, your name has to be on the bond and not your child's.

• The purchase price of raffle tickets and charity-sponsored events in excess of the regular admission price or any other benefit you receive. This can add up if you go to a lot of charity events. If you pay $100 for a ticket to an evening sponsored by your favorite charity that includes dinner and a show, you can deduct what the actual entry price would be if the charity wasn't sponsoring the event.

• You can deduct up to $50 a month for hosting an exchange student. This one we'll be taking advantage of, as we have a student from Germany this year. There are groups lobbying Congress to make this amount higher. I know by the time we add up food and transportation and other costs, it IS actually more.

• Adoption and foster care costs. I think there may also be tax credits due you. This is worth to investigate if you adopted or provided foster care for children.
  

• Subscriptions to investment newsletters and online services. Do you subscribe do Morningstar.com or any other investment websites? What about those email or paper investment newsletters? Get your receipts together and be sure to deduct those.

• Computer expenses. If you use your computer mostly for tracking and working with your investments, you can deduct that. You can depreciate the cost of the computer. This can be a bit complicated but hey, I have a neighbor who spends at least 85% of his time on the computer, day trading and tracking his stuff. He'll benefit from this one.

• Fees for financial advice. If you have a fee based planner, you can deduct that. You cannot deduct if you have a commission based planner though.

• Casualty and theft losses. You can deduct the amount over what your insurance covers. The event must also be a sudden event. You can't claim something just because it broke or wore out. Keep your receipts and proof that you reduced your loss by insurance too, a requirement.

• Work clothes and uniforms. If you don't have a clothing allowance from your employer, you can deduct the cost of your required uniforms and clothing ONLY if you are not allowed to wear them off-duty. I don't think BDUs fall under that...but perhaps there is some other kind of uniform you can't wear wherever? You can also deduct the price of equipment you buy to keep you safe in your job, such as steel-toed boots, goggles and protective wear.

• Subscriptions to professional journals and newsletters. This includes online subscriptions. The subscription must be deemed an ordinary and necessary expense for your job or profession.

• State and local income taxes. All but seven states allow you to deduct this. This works especially great if you bought a big ticket item such as a car or boat. But even if you didn't, you can still save some money here. I know here in Florida, you can calculate a standard amount for those who don't want to go thru what they spent!

• Tax prep fees. If you bought software or hired someone like H&R Block to do your taxes this year, you can deduct that. You can even deduct the price of books about taxes, like the one I mentioned above. When our financial life isn't too complicated, I like to use the free tax software and filing available at Military OneSource. Another free place to do and file your taxes is Tax Act.

• Retirement tax credit. Okay, so this is not a deduction but it can be a GREAT way to save on your tax bill, as long as your adjusted gross income is $50,000 or less (for married filing jointly). You can read more about this tax credit here.
  

Another tidbit I did not know about, you can retro-actively contribute to your IRAs, going back to 2004, using your tax-free combat pay. So, if you forgot to contribute one year, you can still do it now. The legislation that allows this is called the Heroes Earned Retirement Opportunities (HERO). I don't think we contributed our full amount per person back in 2004, which was $3,000, plus they allow you to add $500 as "catch up" money...something to go back and investigate.

If I talk about deductions, I'm also going to mention a few that aren't. These are things that either I might've thought about deducting or are oh-so-not-deduction-worthy, I had to include them:

• blood donations
• bribes
• burial fees
• club dues
  
• country club membership
• credit card interest
• debts belonging to another person that you pay (even if you pay their mortgage)
  
• gift tax
• lunches with co-workers
• over-the-counter medications
• life insurance premiums
• telephone line
• toiletries

One more quick tip and then I'll leave you alone! I used to have such a problem finding all my Goodwill donation receipts and going through old credit card receipts and such, looking for deductible expenses. Now, I have one file folder in my file cabinet labeled, "Tax Deductions". Any kind of receipt or paperwork or proof that I collect throughout the year, gets thrown in there. When tax time rolls around, it's just a matter of taking that stack of stuff out, going through it and making the final determination if you can use it. Once I fill out our tax return and print it out as a backup hard copy, I staple this stuff to it, along with our W-2, 1099s and any other supporting documents we have. This packet then gets put in our fireproof safe. It'll stay in there for seven years. Since I am a paper hound, the older tax returns go back in our regular filing cabinet under "Tax Returns - Old" instead of getting thrown out. Some proof of deductions you may have to keep indefinitely, so when in doubt, don't throw it out.

Hopefully, after reading all this, you'll get fired up to get your taxes done. One less thing to worry about, right? If you travel a lot for your business or are self-employed, I highly recommend Lasser's book. I purposely didn't mention some of the more well-known tax deductions, such as interest payments on your mortgage. Most tax prep software or tax filing sites mention the more popular ones.

If you'd like to share how you organize your taxes, file your taxes or any other interesting deductions I might've missed, please do share them.