Don't Overlook These Itemized Deductions

Smart taxpayers know deductions can cut a tax bill.

Smarter taxpayers develop their deductions strategy early, getting the most out of the tax breaks and avoiding filing-deadline panic.

Figuring out which deductions can help you is important because they aren't dollar-for-dollar tax-reduction tools. They can only cut your taxes on a limited basis by reducing your taxable income. Less income equals less tax.

That means every bit that reduces your taxable income is critical to cutting your final payment to Uncle Sam -- or getting a bigger refund. If you're going to add up your deductible expenses, add them all up on your Schedule A, especially since many deductions require you to reach a certain level before you can use them.

More from Bankrate.com: • Cut your taxes without itemizing • Deducting a business loss • 5 stupid tax mistakes

Tax-savvy filers know that some useful deductions get overlooked in the last-minute rush to find ways to cut a tax bill. So now, with plenty of time to spare, here are some itemized deductions you may have forgotten about.

Many medical costs to consider

There is never anything good about being sick, but don't add to your ailments by overlooking medical costs that you can deduct.

Since total medical expenditures must be at least 7.5 percent of adjusted gross income, many taxpayers don't even bother with this one. But there are ways the Internal Revenue Service says you can get this deduction up to that ceiling.

• Count travel expenses to and from medical treatments. The IRS's Web site posts current mileage rates.
• If you made insurance payments from already-taxed income, add it in here. This includes the cost of long-term care insurance, up to certain limits based on your age.
• What about things your insurance didn't cover, but you needed anyway? This is where you can recoup some of their costs. This includes an extra pair of eyeglasses or set of contact lenses, false teeth, hearing aids and artificial limbs.
• The doctor told you to get that humidifier to help relieve your chronic breathing problems. That means the device -- and additional electricity costs to operate it -- could be at least partially deductible.
• The IRS also has deemed that costs for programs to help you kick the smoking habit are medically deductible, as are weight-loss programs undertaken at a physician's direction to treat an existing ailment such as heart disease.

Special medical needs

Do you have special needs? The medical-deductions section of your tax form is also where you account for the cost of a wheelchair, crutches and equipment that enables a deaf person to use the telephone or that provides television closed-captioning.

If you purchase a hearing or Seeing Eye guide dog, Fido's cost is deductible, too.

Even some home remodeling might be just the prescription for a tax break, as long as you follow your doctor's orders and the IRS's rules. If you need, for example, to add a chair lift to get up and down the stairs, this generally is considered a legitimate expense. Other deductible projects that make a house more accessible for a handicapped resident or individual with chronic medical problems are:

• Adding ramps
• Widening doors and hallways
• Lowering counters and cabinets
• Adjusting electrical outlets and fixtures
• Installing railings, support bars and other bathroom modifications
• Changing hardware on doors
• Grading exterior landscape to ease access to the house

A word of warning, however: Elevators generally aren't deductible. The IRS considers this a structural change that could increase the value of your house and therefore doesn't allow it as a medical deduction.

Yes, there are some good taxes

Some taxes really do come in handy.

If you live in a state with an income tax, you already know the value of deducting those taxes from your federal ones. But don't limit yourself here.

You also can deduct personal property taxes, intangible taxes on investments, real estate taxes, and in some cases the disability taxes you pay.

Want More Money-Saving Tax Tips? Visit our 2008 Tax Center

Go a bit further down the governmental tax chain, too. Did you pay city or county income or property taxes? Then throw them in here.

This means those taxes you paid directly, not just the ones withheld from your paycheck and that show up on your W-2.

For 2005 returns, taxpayers who itemize still get the chance to deduct state and local sales taxes they paid. If you live in a state that collects both sales and income taxes, you'll have to choose which tax amount you want to deduct on your Schedule A.

Residents of states that don't collect income tax but do levy sales taxes will find this is a great break. But it's worth checking out even if you do pay state income taxes. If your income tax is low, and you made a lot of expensive purchases during the year, the sales tax deduction might cut your IRS bill more than your income tax write-off.

An interest(ing) deduction

Every homeowner makes sure he gets that statement from the mortgage holder so that chunk of loan interest can be deducted.

But don't forget that second home or a vacation place with a mortgage. If it meets IRS guidelines for personal use during the tax year, then be sure to include interest paid on that property's loan on your Schedule A, too.

If it's a new loan, make sure you add in here any points -- money you paid the lender to get the loan. Even if the seller paid the points, you, the buyer, can write them offer on your return. If you don't get a statement from your bank with information on points you paid, pull out your closing paperwork and you'll find it listed there.

Investments can help you out here, too. Did you borrow money to buy that hot stock? Interest on that loan is deductible.

Countless charitable contributions

You got the receipt from the Red Cross for your cash donation. You have that one from the Salvation Army for that extra couch you got tired of seeing in the garage.

You're done here, right? Wrong.

There are many noncash contributions that taxpayers forget to add up.

The IRS allows you to deduct the miles you drove your personal car to the soup kitchen where you volunteer each weekend. Again, check the agency's Web site for the current per-mile rate for travel done to help out a charitable organization.

Are you a scout leader? Then the cost of your uniform and its upkeep -- dry cleaning, tailoring, repair -- is deductible.

Letting the IRS share your losses

Most taxpayers think they can deduct casualty losses only if they are victims of a catastrophic natural disaster.

But you don't have to suffer through a fire, flood, hurricane, tornado or earthquake to claim a casualty deduction. Losses from theft and vandalism are eligible losses, as are any damages from an automobile accident as long as it wasn't the result of driver negligence.

The IRS does limit, however, just how much of these losses you can use to reduce your taxable income. Any amount here must be reduced by $100, and then it must exceed 10 percent of your adjusted gross income.

Victims of hurricanes Katrina, Rita and Wilma do get some leeway here this filing season, thanks to tax-law changes that temporarily remove these limits for affected taxpayers.

Myriad miscellaneous expenses

This is a fun category, if you've got the patience -- and receipts -- to back up your spending. And you'll need the receipts because this category, like the medical one, is limited. The total of your miscellaneous deductions must be more than 2 percent of your adjusted gross income.

If you looked for a new job this year, be sure to count your job-hunting expenses here. Just remember that your job search has to be in the same field in which you're already employed. Any subscriptions to work-related publications also can be taken here, as can fees you paid for membership in a professional organization, as long as you weren't reimbursed by your employer.

Do you have a hobby that nets you a bit of extra spending money throughout the year? Any costs you had toward that hobby can be toted up as a miscellaneous expense. But you can't deduct more than you made on the hobby.

Maybe your hobby is a bit more glitzy -- trips to Las Vegas or Atlantic City, N.J., for a little recreational gaming. If it wasn't a good year at the roulette wheel, the IRS lets you deduct your losses. These losses aren't limited by the 2-percent cap, but you can't deduct in losses more than you won.

And finally, if this whole deduction process just got too taxing for you and you paid an accountant to figure it out for you, here's a final itemizing gift from the IRS. Fees paid to professional tax preparers are deductible, too.

Copyrighted, Bankrate.com. All rights reserved.

Be careful using RRSP to buy home

Many rules apply to tax-free withdrawals

Ownership status, closing dates can decide eligibility

My client was very excited about her new condominium when she came to see me, to review the builder's agreement of purchase and sale. She went over the points I had raised with the builder's sales rep and then went to her bank to withdraw money from her Registered Retirement Savings Plan, or RRSP, for the first of four $5,000 deposits.

It was only then she discovered, to her dismay, that the federal Home Buyers' Plan would not allow her to use her RRSP money to buy a condominium scheduled for an occupancy closing in June, 2007. Here's how the Home Buyers' Plan, or HBP, works and why my client couldn't use her own RRSP money for a deposit on her dream residence. Ordinarily, withdrawals from a taxpayer's RRSP are added to that year's taxable income and subject to income tax at regular personal rates. Under the HBP, withdrawals from a taxpayer's RRSP are not subject to tax, as long as the required repayments are made when they come due. Up to $20,000 can be withdrawn from an RRSP to buy or build a qualifying home for a taxpayer who is a first-time buyer or for a related, disabled person. If the taxpayer is buying the qualifying home with his or her spouse or common-law partner, or even with other individuals in partnership, each buyer can withdraw up to $20,000. Naturally, the money cannot be withdrawn if it is not already in the plan, or if it is not cashable — as in the case of locked-in pension benefits, or guaranteed investment certificates which have not reached maturity. In order to qualify to participate in the HBP, a number of pre-conditions have to be met before applying to withdraw RRSP funds:

You have to enter into a written agreement to buy or build a qualifying home.

You have to intend to occupy the qualifying home as your principal place of residence.

You have to be considered a first-time homebuyer.

Your HBP balance on Jan. 1 of the year of the withdrawal has to be zero. Under the Income Tax Act, a first-time buyer is a person who has not owned a principal residence for five years preceding the withdrawal, and who has not lived in a principal residence owned by his or her spouse or common-law partner for the same period of time. This definition is often confused with the first-time buyer definition under the Ontario Land Transfer Tax Act. Under that law, the first $2,000 in land transfer tax is forgiven on a purchase of a house from a builder if the buyer has never — ever — owned his or her own house in the past. After qualifying, several additional conditions must be met at the time of the RRSP withdrawal:

Neither the taxpayer or the spouse or common-law partner can own the qualifying house more than 30 days before a withdrawal is made.

You have to be a resident of Canada.

You have to fill out form T1036.

You have to receive all the withdrawals in the same year.

You cannot withdraw more than $20,000 per person.

You have to buy or build the qualifying home before Oct. 1 of the year after the withdrawal is made. It's this last point that effectively makes it impossible for virtually anyone buying a new home or condominium from a builder to use the RRSP money as a deposit at the time of signing the deal. If the funds are withdrawn at the beginning of January in any year, the house must be purchased, the deal closed and the deed registered within 21 months — before Oct. 1 of the next year. If the withdrawal is made late in the year, the Oct. 1 deadline can be as little as nine months later. In today's market, many closings — especially condominiums — do not have an occupancy or closing date within that time. As a result, RRSP money cannot be used as an upfront deposit, and that's unfortunate. It's not unusual today for agreements of purchase and sale to permit closings to occur as late as five years after the offer is signed. Some pending transactions now in my office have estimated closing dates as late as 2008, but with the built-in extensions, those closings could take place in 2010. At the time the Income Tax Act provisions for the Home Buyers' Plan were written, closing dates of new homes did not contemplate delays as long as these. If the Oct. 1 time limit in the Income Tax Act could be extended to reflect the realities of today's building industry, more people could take advantage of the HBP to make that all-important first deposit on a new home. Once the home is purchased and the money is spent, the taxpayer has up to 15 years to repay the amount withdrawn under the HBP. Minimum annual payments are one-fifteenth of the total initial withdrawal, and the first repayment is due the second year after the year of the withdrawal. Larger payments can be made, but failure to make a payment will result in that amount being added to the taxpayer's income in that year and the loss of the ability to play catch-up for the missing payment in future years. I asked my client if she could withdraw the deposit money from her RRSP, pay tax on it and use the remainder as a deposit, but that would have required a withdrawal of more than $30,000 to net the necessary $20,000, and the RRSP wasn't that big. As a result, my client is being forced by the HBP regulations to buy a resale residence instead of the new condo of her dreams. Maybe it's time for the government to rethink some of the HBP rules. Details of the HBP are available on the Canada Revenue Agency website: http://www.cra-arc.gc.ca/tax/individuals/topics/rrsp

and http://www.cra-arc.gc.ca/tax/individuals/topics/rrsp/withdrawals/hbp/menu-e.html .

--------------------------------------------------------------------------------
Bob Aaron is a Toronto real estate lawyer. He can be reached by email at bob@aaron.ca, phone 416-364-9366 or fax 416-364-3818. Visit the column archives at http://www.aaron.ca.

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Five Homeownership Tax Myths

Owning a home tops the dream list for most Americans, and for plenty of good reasons. It's a shelter for your family, a gathering place for your friends and a good long-term investment.

Tax breaks are also frequently cited as motivation for moving from renting to owning, and there are many ways a home can cut your tax bill.

More from Bankrate.com: • Don't give Uncle Sam early access to cash • Who qualifies as a dependent? • Getting tax help to care for your parents

But, as is often the case with the U.S. tax code, homeownership tax benefits are not always clear-cut. That frequently leads to some bad information floating around.

While myths, half-truths and misconceptions may abound, we've narrowed it down to five that, if you buy into them, could cost you.

Half-truths, misconceptions and just plain hogwash

1. Mortgage interest will reduce my tax bill.
2. All costs related to my home are deductible.
3. I must use home profits to buy a new home.
4. Putting my children on the deed is tax-smart.
5. If I take a loss on a sale, I can write it off.

1. My mortgage interest will reduce my tax bill.

This is true for the majority of homeowners, but not for all. And this tax break won't work forever.

To take tax advantage of your home loan's interest, you must itemize and come up with a total that exceeds your standard amount. On 2007 tax returns, the standard deductions are $5,350 for single taxpayers, $7,850 for head of household filers and $10,700 for married couples who file jointly. These amounts increase a bit each year to account for inflation.

"Given home prices these days, most owners are itemizing," says Mark Luscombe, principal tax analyst with CCH Inc. of Riverwoods, Ill. By the time they count mortgage interest, property taxes and other nonhome deductions, such as state taxes and charitable gifts, their itemized totals easily surpass their allowable standard deductions.

But most is not all.

Want More Money-Saving Tax Tips? Visit our 2008 Tax Center

Taxpayers who buy a home late in the year, for instance, might find the standard deduction is more beneficial, at least initially, says Kathy Tollaksen, a CPA at Sikich LLP in Aurora, Ill. In these cases, where you make only a few payments in a tax year, depending on your loan you might not pay much interest, at least not enough to exceed standard amounts.

Timing also could reduce or eliminate other home-related tax breaks.

"Quite a few states have real estate taxes that are calculated in arrears. That is, they have already been paid or mostly paid (by the seller) by the time you buy," says Tollaksen. "In the first year, you're seeing taxes that are someone else's responsibility so you're not getting the full tax value of your real estate taxes."

The benefit of mortgage interest also could be a myth if you've lived in your home for a long time. In this case, you likely are paying more toward your loan's principal instead of interest. So homeowners at the end of a loan term don't get much, if any, from this tax break.

Or, as Bob D. Scharin, senior tax analyst and editor of Warren, Gorham & Lamont/RIA's monthly tax journal "Practical Tax Strategies," puts it, "Every deductible expense you incur may not produce a deduction."

2. All costs related to my home are deductible.

There are no two ways about this one. It's flat-out false.

"Some buyers think, hope, they can write off everything connected with the house," says Tollaksen. "Not so. Association fees and property insurance costs are not deductible."

Neither, in most cases, is private mortgage insurance, which your lender probably required if your down payment was less than 20 percent. However, a new law changes the deductibility of PMI for mortgages originated or refinanced between Jan. 1, 2007, and Dec. 31, 2009.

If you got your mortgage and policy in that time frame, you might be able to deduct your insurance premium payments. The law also extends beyond private insurance to others, including FHA, VA and rural housing.

There are some limits, though. The PMI deduction is phased out for taxpayers with adjusted gross incomes exceeding $100,000 and is totally elimitnated once AGI reaches $110,000.

Don't try to deduct basic maintenance, repair or home improvement costs either.

Tollaksen says, "I've had people say, 'I put a new roof on my home; can I deduct that?' No."

If you try to write off these expenses, expect to hear from the Internal Revenue Service and to pay a higher tax bill (and possible penalties and interest) after you refigure your taxes without the disallowed deductions.

However, you still need to keep track of these expenses.

"If you convert the home to rental property or sell it," she says, "these costs will affect the property's tax basis."

A home's basis is critical when it comes time to sell. And selling is also a tax area in which many people fall for myth No. 3.

3. I must use money from my home sale to buy another residence.

This used to be the only way to get around a tax bill on a home sale. Even then, you were only able to defer taxes by purchasing a new residence of equal or greater value with the profits from your other house. When you sold your final house, you'd owe those long-deferred taxes you had rolled over throughout the years. Home sellers age 55 or older were allowed a once-in-a-lifetime tax exemption of up to $125,000 in sale profit.

But on May 7, 1997, home-sale tax law changed. Still, almost a decade later, many homeowners are confused about the tax implications of selling.

"I recently heard some neighbors talking about having to buy another house when they sell to avoid the taxes," says Scharin. "If the last time you sold the house was before 1997, you're thinking of those old rules."

Don't worry. Most taxpayers still get a nice break. Now, if you live in the house for two of the five years before you sell, the IRS won't collect tax on sale profit of up to $250,000 if you're single or $500,000 if you and your spouse file a joint return.

"The law change has really affected people's behavior," says Luscombe. "Before, it didn't really matter much whether you sold frequently or held onto your home for a long term. You, basically, could roll over the gain into a larger home and people could avoid tax until they sold for the final time without putting it into a replacement home.

"Now the law rewards people who sell frequently. In this current market, people who sell every couple of years can get and keep their gain," Luscombe says. "But people who buy and hold might find they have reached the point where the gain exceeds the exclusion."

That means they face unexpectedly high tax bills, even at the lower 15-percent capital gains rate. The profit could also push them into a higher overall tax bracket, meaning they would make too much to claim some deductions, credits or exemptions. They also might even end up owing alternative minimum tax.

Another problematic consequence, says Luscombe, is that when the new rules took effect, people basically quit keeping records related to their homes.

"They thought: Since we're never going to be taxed on the sale, there's no need to keep track of what we paid and what improvements we made," he says. The improvements add to your home's basis, which you subtract from the sale price to determine your profit and whether any of it is taxable.

"Now with inflation in the housing market, a lot of people are selling homes in excess of the gains without any way to show that their tax bill should be less," says Luscombe.

4. Putting my child on my home's title is a smart tax move.

Worries about taxes on a residence sometimes lead homeowners to fall for this myth. It's a particularly tricky one, because it combines confusion about residential taxes with the even more complex estate-tax area.

"Sometimes we'll hear about taxpayers who, in doing some quick back-of-the-envelope estate planning, decide to put their home in the children's names," says Tollaksen. "The thinking is: My son or daughter won't have to worry about this when I die."

The goals: Avoid probate, keep the home in the family and get the property out of the parent's estate for those tax purposes. Such a move, however, could produce other tax problems for your children.

Unless the child moves into the newly deeded house with the parent and lives there long enough (two of the previous five years) to make the house the child's main residence, too, says Tollaksen, the son or daughter won't get the $250,000 or $500,000 residential tax break when the child later decides to sell. Without establishing primary residency in the house, either before or after the parent passes away, the child's ownership is viewed as an investment property.

Other parents opt to simply add a child's name along with theirs on the title to the house, known legally as a joint tenancy. It doesn't mean that all the owners live in the home, but simply that two or more people hold title to the property.

This, too, can produce tax complications.

Generally, when someone inherits a property, its value is stepped up. That means when the owner dies, the property becomes worth its fair market value that day.

But if the child co-owns the property with his parent, the child doesn't get to fully use stepped-up basis. Tax law considers the addition of the child's name to the title as a gift. And, along with that half of the home, the child receives half the basis that his or her parent has in the property.

This is known as the property's carry-over basis. And it could be costly.

Consider, for example, that you bought your house many years ago and your basis in the property is $50,000. You add your daughter to the title. When you die, she inherits your half of the home, which by then is worth $250,000. A buyer offers $300,000 for the home.

Pretty good deal, right? From a real estate perspective, yes. But not when it comes to your daughter's tax bill on the sale.

What had been done with the best parental intention turned out to carry a big price because of this homeownership tax myth.

5. If I take a capital loss when I sell my home, I can write it off.

This myth, like No. 2, was probably started by wishful homeowners. Sorry, it's just as wrong.

It is true that real estate, like any other asset, has the potential to go down as well as up in value. But unlike most of those other holdings, you cannot write off any loss you suffer if you must sell your main residence for less than what you paid.

That's because your residence, under tax law, is considered personal property.

"When you sell your home for a loss, it's not like other capital items," says Scharin. "You don't get to deduct personal property that you sell for a loss."

"It's the same as any personal property that declines in value," says Luscombe, "like that old TV you sold to the neighbor kid so he could take it to college. You sold it for much less than you paid, but you can't take a loss."

You do, however, have to pay tax on gains you make when selling personal property.

But at least you now know the difference between fact and fiction when it comes to your residential property, which will help you make appropriate real estate and tax decisions in the future.

Copyrighted, Bankrate.com. All rights reserved.

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