It is the one subject that is guaranteed to turn heads: Taxes. The average American will pay more in taxes in their lifetime than any other expense. This is why you MUST use each and every tax deduction available to you so you can keep more of what you earn. Here is a list of some of my favorites to recommend:
1. Sales Tax Deduction: If you live in a state with no state income tax (i.e. Texas, Florida, Alaska, Nevada, South Dakota, Wyoming, and Washington), then it may make sense for you to elect to deduct the total amount you paid in sales tax on an itemized basis. This is especially useful if you made big ticket purchases during the tax year, but even if you didn't, it still adds up. Think: you should not pay tax twice on the same money!
2. Startup Business Tax Deduction: If you are considering starting a business, did you know that before you actually open shop, you can begin taking deductions on your personal tax return (usually Schedule C) for startup costs? The first category of costs that qualify are described by the IRS as "investigating the creation or acquisition of an active trade or business." These include researching your new market, product analysis, labor supply, visiting possible business locations.
The second category is costs that are required in order to get the business ready to operate (still before you actually open for business). These expenses include employee training & wages, consultant fees, advertising, and travel costs related to sourcing clients, distributors, vendors, etc.
The third category is organization costs. This includes legal fees paid to incorporate by forming an entity such as a corporation or LLC. Also included are state filing fees for forming your entity, salaries for temporary directors, accounting fees, etc. These expenses must have been incurred before the end of the first tax year during which the corporation is in business.
Note: You are allowed to deduct up to $5,000 in startup costs in your first year. For any amounts that exceed the $5,000, up to $50,000, you may amortize your deduction generally over 180 months. If your startup costs exceed $50,000, the amount you can fully deduct in the first year is reduced dollar for dollar by the amount that exceeds $50,000.
3. Business Use of Home (Home Office) Deduction: This is a very valuable tax deduction if you work from home all the time, or potentially even if you don't always work from home but have a dedicated space in your home for the purpose of conducting your business and meeting with clients, etc.
To qualify for this, you must use part of your home as one of the following:
a. Exclusively and regularly as your principal place of business for your trade or business
b. Exclusively and regularly as a place where you meet and deal with your patients, clients, or customers in the normal course of your trade or business; or
c. A separate structure used exclusively and regularly in connection with your trade or business that is not attached to your home
d. On a regular basis for certain storage use
e. For rental use
f. As a daycare facility
The IRS changed the rules recently to allow you some flexibility in how you take this deduction. In the past, the Regular Deduction method was required (and still available), and generally you calculate the percentage of your home (by square footage) that is dedicated to regular and exclusive use by your business. Then that percentage is applied to your home expenses, such as mortgage insurance, utilities, insurance, security system fees, repairs, etc.
The new Simplified Method is the other option. This will give you a deduction of $5 per square foot of your home used regularly and exclusively for your business, up to 300 square feet. My recommendation is run the numbers for each option and take the larger deduction option.
Note that even if you are an employee and not a business owner, you can still qualify for these deductions if your work from home is done there as a convenience to your employer. You also cannot rent that portion of your home to your employer and also receive the deduction.
4. Charitable Contributions to a 501 (c) 3 Organization or Church: This is probably the most well-known tax deduction out there. You can deduct dollar for dollar generally up to 50% of your AGI, but the contributions must be to a charity that has tax exempt status per IRC section 501 (c) 3, and you must not have received any goods or services in return. Additionally, note that a church does NOT have to be registered as a 501 (c) 3 in order for your donations to be tax-deductible. Make sure you request a year end statement from the charities to have a record of your donations.
5. Student Loan Interest Paid By Parents & Deductible By Child: If a child is no longer being claimed as a dependent by his/her parents, and if the parents are paying the child's student loans, the child is able to deduct up to $2,500 annually of student loan interest that the parents paid.
6. Mortgage Interest: This is also very well-known, but it doesn't hurt to mention it anyway. You will receive a Form 1098 from your lender or mortgage servicer which will specify the amount you paid in interest.
7. Qualified Medical Expenses: If you do not own your own business (as a sole proprietor or formed as a corporation) and do not have a Section 105 Health Reimbursement Arrangement, then you are limited to only deduct medical expenses that exceed 10% of your AGI. So for example, if your AGI last year was $80,000, you can only start deducting any expenses once they exceed 10%, or $8,000. If you paid $10,000 in medical expenses last year, then you can deduct $2,000. Note: If you or your spouse are 65 or older OR turns 65 during the tax year, the deductibility threshold decreases to 7.5% of your AGI. This temporary exemption is in place until December 31, 2016.
8. Job-Search Costs: If you spent money looking for a job, you can deduct these expenses by the amount that they exceed 2% of your AGI. These expenses include mileage (57.5 cents in 2015 & 54 cents in 2016), food & lodging if you traveled overnight in your job search, taxi fares, advertising and business cards, as well as expenses related to printing resumes.
9. Moving Expenses Due To Job Change: If you moved primarily because of a change in job, and your new job is more than 50 miles away from your previous place of residence, then you can generally deduct moving expenses incurred.
If you are an employee, you must work full-time for at least 39 weeks during the first 12 months immediately following your arrival in the general area of your new job location. If you are self-employed, you must work full time for at least 39 weeks during the first 12 months and for a total of at least 78 weeks during the first 24 months immediately following your arrival in the general area of your new work location.
If you are a member of the Armed Forces and your move was due to a military order and permanent change of station, you do not have to satisfy the distance or time tests.
10. Uniforms: If your job or business requires you to wear a uniform that involves attire that is not usually worn for everyday use (think firefighters, police officers, nurses, athletes, etc.), and you had to come out of pocket to either purchase them, these expenses are deductible. Costs incurred to purchase theatrical clothing worn by musicians, entertainers, and performers are also deductible.
11. Medical Expenses & Health Insurance Premiums (Self-Employed): If you are self-employed and structured as either a sole proprietor or a C corporation, you can let your business or corporation deduct medical expenses and health insurance premiums that it reimburses you tax free. You must pay the expenses out of your personal pocket first, then submit the expenses to your business for reimbursement. Then your business or company reimburses you, and deducts the costs on ITS tax return. You will want to set this up professionally though--it's known as an HRA (Health Reimbursement Arrangement). Contact us for more details.