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Collect Info Now for Tax Deductions

It takes time to gather all of the information for tax deductions, especially if you wait until after the end of the year. Any time you take steps to collect information that will be helpful puts you that much ahead when it’s time to file. Many people say, “It’s not worth it.” Every year is different, so consider taking deductions each year to see if you can save some money on taxes. And before you essentially toss money out the window, consider that you can reduce your tax bill by deducting miscellaneous costs that add up to more than 2% of your adjusted gross income (AGI). Put in simple terms, if your AGI is $60,000 (your total income from all sources, less adjustments such as self-employment tax, IRA contributions, alimony payments, and deductions for tuition and fees), then all expenses over $1,200 are deductible. Miscellaneous deductions include expenses you paid for in your work if you are an employee, tax return preparation or safe deposit box rental. You must be able to itemize your deductions on your return to claim these costs. Examples of other miscellaneous expenses include:

  • Unreimbursed employee expenses
  • Job search costs for a new job in the same line of work
  • Tools for your job (unreimbursed)
  • Union or association dues
  • Work-related travel and transportation (including parking and tolls)
  • Professional tax preparation fees or tax prep software
  • Mileage you drive to do volunteer work

Some deductions are not subject to the two percent limitation. They include:

  • Certain casualty and theft losses, such as damaged or stolen property you held for investment (stocks, bonds and works of art)
  • Gambling losses up to the total of your gambling winnings
  • Losses from Ponzi-type investment schemes

Medical expense deductions

Medical expenses are different than miscellaneous expenses. To qualify for deduction, medical expenses must exceed 10% of your AGI, or 7.5% if you or your spouse are age 65 or older. Because many insurance plans have high deductibles, reaching the deductible amount may not be as difficult as it seems. The categories of deductible medical expenses are quite broad, and include fee payments to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and non-traditional practitioners, such as acupuncture or drug and alcohol treatment centers. You may also deduct the portion you pay for prescription costs, in-patient care, and transportation costs to and from the medical facility. If you pay the cost of your insurance premium for medical care and/or a long-term care policy, the premium is deductible. (It’s not deductible if paid for by your employer, or for the pre-tax amount that you pay as a percentage.) People who are self-employed and have a net profit for the year may qualify for the premium amount as an adjustment to income, rather than an itemized deduction. For more information, refer to the IRS Website.

How to save expense records

The IRS requires an actual receipt as proof of purchase, not just a line item on a credit card bill. You don’t actually need the physical receipts unless you’re audited. You can collect and store paper records if you are disciplined about having a system. Another way is electronic storage. You can store electronic receipts that come by email by saving the email or receipt in a folder on your computer or tablet, or in online storage, such as Dropbox. You can also take a picture of the receipt with your phone or tablet and save the photo in the same file. Keep in mind that records are supposed to note the business purpose, and if entertaining, the name and company of the person being entertained. If you have a lot of expenses to collect, search for an app that’s easy for you to use, so you’ll truly take advantage of the benefits. Without a system to organize deductions, you’re sure to forget or miss out on deducting legitimate expenses.

Please talk with a Salmon Sims Thomas tax advisor if you have questions.