You can significantly lower your tax bill if you make the most of your deductions. The Internal Revenue Service claims two-thirds of taxpayers take the standard deduction. For the 2012 tax year, that's a deduction of $5,950 for single taxpayers and married people filing separately, $8,700 for heads of household and $11,900 for married couples filing jointly. The third of taxpayers who itemize, however, claim far more -- an average $25,545 in 2009, the latest figures available.
Some deductions are more obvious than others. For example, if you have a mortgage, you probably know that mortgage interest is deductible. Ultimately, you might be eligible for more breaks than you think.
A lot of people don't catch that they can choose state income tax or sales tax, and pick the less valuable choice.
Walt Hatter, founder of Hatter & Associates in Fort Worth, Texas
Unreimbursed job expenses are deductible if they and other "miscellaneous itemized deductions" total more than 2 percent of your adjusted gross income. This category covers an array of possible expenses, including cellphone minutes used on work calls, union dues and miles driven for work meetings at a rate of 55.5 cents per mile. Teachers get a separate break for up to $250 in classroom supplies.
"There's a line for it on page one of your tax return," said Glen Ross, chief executive of Prosado.com, a site that helps consumers find a tax preparer.
Spend more, and you may be able to claim the excess if you itemize.
Job-hunting expenses can also fit the bill in certain circumstances. It counts if your new office is at least 50 miles farther away from your old home than your new home will be. You also have to work full time for at least 39 weeks during the 12 months after your move.
Charitable donations are deductible for up to 50 percent of your adjusted gross income. But don't stop with tallying those made with a check, cash or credit card, said Walt Hatter, a certified public account and founder of Hatter & Associates in Fort Worth, Texas. If you donated to charity through your employer, your year-end pay stub often notes that payroll deduction. You also need to factor in the value of any donated goods.
Volunteers can also deduct out-of-pocket costs, be it brownies made for the church bake sale, time spent redesigning a nonprofit's website or miles driven to get your child's Boy Scout troop to an event, Hatter said. The IRS reimburses each mile driven for charitable work at 14 cents, and offers paybacks for tolls and gas.
Consumers who itemize can deduct state income tax paid or state sales tax paid over the tax year.
"A lot of people don't catch that they can choose state income tax or sales tax, and pick the less valuable choice," Hatter said.
There's no need to save every receipt. The IRS has a calculator to help you figure out your typical spending for the year. It doesn't factor in big-ticket items such as cars, boats and homes. Those get added in on top.
"It's good to plan ahead on that, if you have a year of big purchases," Hatter said.
Interest paid on a mortgage is just the beginning, said Abe Schneier, senior technical manager for taxation at the American Institute of Certified Public Accountants.
"Say you refinanced last year," he said. "If you paid any fees or points for that refinancing, you may be able to get a deduction over the life of the mortgage to amortize that."
Interest paid on home equity loans and lines of credit worth up to $100,000 is also deductible, to a point. You can only deduct interest on the loan portion equivalent to your equity in the home, he said. For example, if your home is worth $150,000 and you have a $120,000 mortgage, only the first $30,000 of the loan up to the property value is deductible.
If you itemize, tax preparation costs paid that tax year are deductible, said Hatter. Most people claim their accountant's fees or software costs, but tax law also often allows deductions for estate planning with a tax focus, such as a will or living trust. Another place to look: investment advice fees. Brokerage and adviser fees are often taken directly from your account, so they can be easy to miss. They're only deductible if they and other "miscellaneous itemized deductions" amount to more than 2 percent of a taxpayer's adjusted gross income, he said.
Making Deduction-Spotting Easier
Taxes will be easier to complete in future years if you resolve to better track your deductible expenses. If you wait until tax prep time to sort through a shoebox of receipts or multiple folders of expenses, some are likely to slip through the cracks.
Three items to save:
Receipts. Make notes of what purchases might be deductible and why says certified public accountant Tim Abbott, the accounting and tax manager at M.J. Vandenbroucke Inc. in Chicago. Take particular care to save cash receipts since they won't be recorded elsewhere.
Monthly bills. Utilities can qualify for a home office deduction, and cellphone calls could be deductible as an unreimbursed work expense.
Payroll records. Union dues are unreimbursed work expenses, and charitable contributions made through an employer will also be noted here.
Charitable donation records. Draft an itemized breakdown of donations of clothing and other goods. It's easier to tabulate the worth of four sweaters, one dress, one shirt and two pairs of pants than "two bags of clothing."
Mileage. Keep a notepad in your car to monitor the odometer at the beginning and end of travel for work, medical or charitable purposes.