Last week I talked about collecting paperwork for your income for your income tax. This week I am going to talk about collecting paperwork for the deductions (subtractions) from your income tax. While most deductions can be only taken if you itemize (list on Schedule A) your deductions, some can be taken even if you do not. I would also like to explain “deductions” and “credits”. A deduction will decrease your taxable income. A credit will directly decrease the amount of tax you owe.
Paperwork for deductions is harder to collect and organize than that for income because while most of the income papers come to you at the end of the year, the paperwork for deductions is ongoing through out the year. Remember the envelope I suggested you set up? Proof of your deductions should also go into the envelope - if you start the envelope for the year in January you can add in the papers as you go through the year. Even if you were not able to itemize your expenses last year drop the related paperwork in the envelope - you never know.
Again, nothing in this blog is intended to be income tax advice and you should always consult your tax advisor/preparer for what deductions you can take and what documentation you need.
The first type of deduction is medical. This includes medical insurance, doctors, dentists, laboratory fees, prescriptions (generally not over the counter medications), hospitals & other procedures, eyeglasses, hearing aids, dentures, braces (tooth and otherwise) etc. You may have canceled checks, credit card slips, receipts for payments, statements from your medical insurance, etc. Drop them into the envelope as you get them. Get a color ink pen and whenever you pay anything which can be taken as a deduction on your taxes put a mark in your checkbook and/or next to the listing on your bank statement so you can easily find the amounts you spent which are tax deductible at the end of the year. Keep track of your mileage for medical trips or keep receipts from public transportation as you can deduct the cost of the trips. There is a mileage rate set every year by IRS, lower than that for business, specifically for medical trips, so if you know how many miles you traveled during the year for same, you can deduct for same. Medical expenses for “you” includes those for your spouse and anyone from your household you who you claim as a dependant (list) on your tax return.
The next type of deduction is taxes. If you pay state/local income taxes, real estate taxes, depending on your state - personal property taxes, car personal property taxes (different from car registration) and other similar taxes they are deductible. If you buy a large item during the year (such as a car) you want a record of the sales tax you paid on it. Again, copies of checks (or marked items on statements and/or in checkbook), paid bills, etc. should be kept. If your locality allows you to request a paid bill - get it (I know that all I have to do to get same is to check a box on the slip I send with the real estate tax payment).
Next is mortgage interest. There are limits and requirements, but most interest on your home (and a second home) mortgage is deductible. You should receive a form 1098 at the beginning of the next year (around when you get your W2 and 1099s) showing the amount of interest you paid during the year. It may also show the real estate taxes and/or home owners’ insurance your mortgage company/bank paid for you. If you have more than one mortgage you should receive a 1098 from each of them (whether you have multiple mortgages on the same house or you sold your house during the year and had mortgages on the new and old house or there is one on each of several houses you own.) The insurance is not deductible, but the form can be used to show proof of the amount of real estate taxes you paid. If you live in a coop you may receive one of these from your coop showing your share of what the coop paid, as well as a second one from your personal loan on your coop. Guess what? Drop the 1098(s) in your envelope.
Charitable contributions? The government wants us to be generous to what we call charities (they call them not for profit, tax exempt organizations). This includes a large variety of organizations from large (such as the American Cancer Society) to medium size, local (your church or other house of worship) to small (a foundation set up for the family of a firefighter who died for example). One thing that they all have in common is that they have registered with IRS and have been declared to be a not for profit, tax exempt organization. IRS has a list online - https://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check
If an organization is not on this list you can not deduct contributions to it. This includes the dollar you give the homeless man or woman on the corner. (It is generous of you to do so and I am not telling you not to, but you cannot deduct it.) Again, you need proof of the amount you donated - our old friends the record of the check to them or a credit card record of money donated, etc. These again go into the envelope. Some organizations, such as churches or synagogues or mosques will send you at the end of the year what you have donated during the year - if you are donating cash to your church there is usually an envelope you can put it in with your name or other information so that at the end of the year they can send you a letter with how much you have donated during the year including the cash. (What you pay for items you purchase at the bazaar, rummage sale, etc. during the year are not deductible.)
You can donate other than cash. If you donate items to an organization (you know the stuff you are getting rid of while decluttering and organizing your home) - Goodwill, Salvation Army, and St. Vincent dePaul being the more common ones I know - they should provide you with a receipt for your donations. When I do this I make a list of what I am bringing and how many bags, etc. they are in. They will then give a receipt saying, for example, 3 bags, and I will attach my list to the receipt and drop in the envelope (well in my case it is a file, but for you - your envelope). The organizations are not allowed to provide a value to you for the items donated. When you are doing your taxes or when you get a chance - there are websites, including one from the Salvation Army, which will provide you with a range of values for various common items - remember the value is not what you paid for it, but what the item would sell for in a thrift type store.
In certain cases if an item one is donating is expensive there are special rules for deducting the donation, including the need for appraisal. So, as I say, make sure you check with whoever prepares your taxes as to what information and documentation you need.
If you volunteer your time for a listed organization you can deduct your expenses in doing so. You cannot deduct the cost of your time, but if you need to spend money in volunteering the money spent may be deductible. My husband and I are reenactors. Our unit is an educational not for profit, tax exempt organization. We have to provide our own period clothing - the cost of same is deductible. If I am going to demonstrate something to the public and I need equipment or supplies to do so and I pay for them - the cost is deductible. You can deduct the cost of traveling to and from where you volunteer - again there are IRS special set mileage rates for volunteering so keep records of when you volunteer and where so you can take the mileage and get and keep receipts if you use public transportation.
Well, this is running long. I guess there will be a part 3 continuing with some of the other deductions you can take and should save records for.
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