Take that: Best tax breaks to grab now

Wed Feb 8, 2012 6:10pm EST

1 of 2. A woman walks out of an Internal Revenue Service office in New York April 18, 2011.

Credit: Reuters/Lucas Jackson

Related Topics

(Reuters) - Until the current tax system is completely reformed, we Americans have the right to life, liberty, the pursuit of happiness and our cherished tax deductions.

It's not cheating to take every writeoff that is legally available to you; it's just good common sense. If you skip one, you're just leaving money on the table.

So here's a list of some of the most popular and overlooked tax deductions for tax season 2012. Take them while you can.

* Retirement planning. Writeoffs for individual retirement accounts aren't new, but some people have gotten used to not taking them because most have income limitations that exclude many taxpayers. Look again, says Barbara Weltman, author of "J.K. Lasser's 1001 Deductions & Tax Breaks 2012." That's because salaries have remained somewhat flat while many of these limits have moved up over the years through legislation and inflation adjustments.

If, for example, you actively participate in your 401(k) plan, you can still take a full deduction for putting money into an IRA if you make less than $56,000 (or $90,000 if you're filing jointly). You have until April 17 to make a 2011 contribution of up to $5,000, or $6,000 if you are 50 or older.

* Medical costs. Tax filers who want to deduct their medical expenses have always had a high hurdle to jump: They aren't deductible until they exceed 7.5 percent of your adjusted gross income. But Weltman notes that it's getting easier to do that, because workers are paying more for their health insurance and salaries have stagnated. Don't forget that there's a long list of items you can include, such as braces, contact lenses, physical therapy, birth control pills, and some home improvements, like air conditioning if your doctor says you need it for breathing problems or allergies.

* Charitable donations. Most people actually undervalue the clothing and other items they give to charity, says Audrey Griffin, an enrolled agent from Centerville, Georgia. (An enrolled agent is a tax preparer who has passed an IRS exam and is qualified to represent you with the agency.) She says that when you put the actual resale value on every shirt and old lamp you give, you'll end up with a bigger deduction than you expect.

To do that, use a system. You can enter your gifts into TurboTax's ItsDeductible (here)

even if you don't use Turbotax. The Salvation Army also offers a guide here

Remember that you need a receipt from the charity for each donation you deduct, even if it was just the $5 bill you threw into a bucket over the holidays.

* Volunteer time. If you spend money and drive time working for a charity, don't forget to deduct them. You get 14 cents a mile for every charity trip you take, so volunteers who regularly deliver meals to shut-ins or drive to distant locations on volunteer trips can save money by tracking their mileage. And if you spent money out of pocket for supplies for your volunteer work, you can deduct those expenditures too. Just make sure you get a letter from the charity thanking you for your donation.

* Education costs. There are myriad tax breaks for self- (or child) improvement, and learning which one to take can be a challenge. But if you're spending a lot on college for your kids, you may be able to pile deductions on top of credits. Here's a short course: The American Opportunity Credit is the most generous, offering $2,500 per student for college or other postsecondary school. You get a dollar for dollar credit for the first $2,000 you spend, and then 25 percent of the next $2,000.

After that is the lifetime learning credit. It's $2,000 per taxpayer, not per student, and can be used for graduate school or continuing education costs.

Finally, there's a $4,000 deduction for tuition and fees, even for taxpayers who don't itemize their deductions. But you can't take that in the same year you take the credits.

You can take these education tax breaks even if you're pulling money out of a 529 plan for college, but you can't double count the money. That means you can't take a credit or deduction for the same money you take out of a tax-deferred plan. If you pull $10,000 out of the 529 and spend $2,500 out of pocket, for example, you can claim the credit for the $2,500.

* Investment losses. Last year was rocky for anyone in the stock market. If you sold losers from taxable accounts, you get a writeoff. Long-term losses (those on securities held more than a year) can offset long-term gains and an additional $3,000 in ordinary income.

* Taxes. There's a poetic symmetry in deducting taxes you've paid. You're allowed to deduct state income taxes (or sales taxes, if they're higher than your income taxes), half your self-employment taxes, and estate taxes you paid.

* Those miscellaneous deductions. There's a grab bag of extra deductions you can take once they top 2 percent of your adjusted gross income. Some taxpayers "bunch" these expenses into every other year just so they can meet that floor. Some items that qualify as miscellaneous deductions are: union dues, job hunting expenses, uniforms, appraisals for charitable gifts, trade publication subscriptions, and -- last but hardly least -- tax preparation fees. So you can pay someone else to worry about all of this for you.

(Reporting by Linda Stern; Editing by Steve Orlofsky)

FILED UNDER: