Many people complain about the high cost of taxes, but savvy tax preparers know about the best tax deductions available: simple items that can save hundreds or thousands of dollars of tax burden for average taxpayers. Of course, not every deduction is suitable for every financial situation, and because tax codes change continually, interested individuals should always consult a professional tax preparer or tax accountant before making adjustments to their annual returns. State tax codes vary as well, and limits and applications for different deductions can change significantly depending on how tax documents are prepared. Actual savings for each deduction range widely relative to overall income, type of tax return, taxes withheld, and other considerations.
1. Home Mortgage Interest
To help alleviate the cost of purchasing a home, mortgage interest can be deducted. This is especially valuable to new homeowners who may not have much in the way of savings after down payments and closing costs, but this deduction is beneficial to all homeowners. Qualified second homes are also eligible for this deduction, as are other types of homes in specialized circumstances.
2. Home Office
Individuals who establish a dedicated home office may be able to deduct not only the supplies for that office including furniture and other equipment, but also the room's representative portion of utility payments and other upkeep costs. To qualify for this deduction, the space must be exclusively an office, however, and misrepresented claims are subject to intense audits.
3. Charity Donations
Charitable donations qualify as one of the best tax deductions because they cover not only financial contributions, but also donations of goods such as items given to a non-profit thrift store or other charitable institution. In specialized circumstances, professionals offering pro-bono work to charities can deduct the equivalent of their standard fees for that work as well.
4. Moving Expenses
Depending on the distance of the move and the reasons behind it (generally related to job relocation), moving expenses can be considered a tax deduction. This may include not only the cost of freight shipping for household and personal goods, but also the cost of moving supplies (boxes and other packing material), hotels and meals during the relocation, and related job search expenses.
5. Hybrid and Clean Fuel Vehicles
To encourage gas conservation and environmental responsibility, the alternative motor vehicle credit offers tax breaks to owners of new hybrid and clean fuel vehicles ranging from $400-$3400 depending on the efficiency of the vehicle along with its make and model. This deduction only applies to new (not used) vehicles placed in service during the tax year, however; those on a waiting list to receive a qualifying vehicle are not eligible.
6. Student Loan Interest
A great relief to recent graduates, student loan interest can be deducted while loans are being repaid. With many college students entering the workforce with greater than $15,000 worth of debt, the interest deduction can be a significant savings. Be sure to add interest from all student loans to avoid missing any possible deduction.
7. Vehicle Mileage
Self-employed persons or individuals with home-based businesses may be able to make significant mileage deductions for using their car for business purposes. Keeping track of odometer readings before and after each trip will make this deduction easier if the car is also used for personal driving, but with the mileage deduction valued at greater than 40 cents per mile, even a few miles can add up to great savings.
8. Educator Tax Credits
Qualified classroom teachers and administrators may be able to deduct up to $250 to offset the cost of educational supplies purchased out-of-pocket. These supplies must be directly used in the classroom and may include computer equipment, project supplies, decorations, textbooks, and other educational materials.
9. Child Care Expenses
Working parents are able to deduct a certain percentage of child care expenses if they use a licensed child care provider. While there is an upper limit on this deduction, even a partial deduction can lead to great savings and help compensate for the cost of such expenses.
10. Technological Equipment
Computers, copiers, fax machines, and other office equipment are deductible for self-employed persons and small business owners who demonstrate a need for such equipment. These items are some of the best tax deductions for long-term savings because they are typically amortized through the life of the item, generating tax savings year after year.
11. Professional Membership Fees
There are professional organizations for nearly every career, and joining such organizations can be beneficial during tax season because the dues and membership fees may be tax deductible. This also includes subscriptions to profession-oriented trade magazines and participation in professional events such as trade shows, conferences, and workshops, including travel expenses for such events.
12. Work Equipment
Tax deducting work equipment is the perfect example of little things adding up to big savings. While items to be deducted must relate directly to the career in question (beauty products for cosmetologists, tools for mechanics, etc.), there is usually no limit on the amount that can be deducted within reasonable expectations. Work uniforms also fall into this category.