Many people don't realize that an old sweater in the closet or even that used sedan in the driveway can reap major tax benefits. There are many tax deductions you may have overlooked that are laying around the house or while performing your day-to-day activities.
1. Check your closets!
You may have hundreds of dollars sitting in the back of your closet, under your bed, lying around the garage or in the trunk of your car. If you contribute old clothes, furniture and other items to a qualified charitable organization, you can deduct the wholesale fair market value of the contributions on IRS Form Schedule A. Clothing, furniture, sporting goods and computers are just a few examples of items charitable organizations will graciously accept.
You can also deduct any expenses you many incur from your charitable actions. Did you buy snacks for a youth group? Use your car for a weekly Meals-on-Wheels trip? If so, you can deduct the expenses you incurred. Mileage may be deducted at a rate of 14 cents per mile if a vehicle is used for a charitable purpose. Just remember to get and keep all receipts from organizations for all of your good deeds. Note that you must itemize your deductions on a Schedule A to get this charitable credit. You cannot deduct donations if you are taking the standard IRS deduction.
2. Unpaid loans may be a blessing in disguise
Many generous individuals do not know that you can recover part of the bad debt through a tax deduction if you loan money to a friend or family member and do not get repaid. These are typically considered non-business bad debts and are deducted on Schedule D of your tax return as a short-term capital loss.
To take this deduction, you must first establish that you have taken reasonable steps to collect the debt and that the debt is worthless. A debt becomes worthless when the surrounding facts and circumstances indicate there is no longer any chance the amount owed will be paid. You do not have to wait until the debt comes due. Bad debts are deductible only if the amount owed has been previously included in your income. For more information, see Publication 535, Business Expenses and Publication 550, Investment Income and Expenses on the IRS Web site at www.irs.gov.
3. Have credit cards? Pay them off with a home equity loan
Using a home equity loan to pay off credit card debt has more benefits that just a lower interest rate. Paying off debt with a home equity loan rather than credit cards can put money back in your pocket. Credit card interest is not deductible, but home equity interest is using a Schedule A.
4. Bunch medical deductions
Many deductions, such as medical expenses, require you to overcome a minimum. For example, only medical expenses that exceed 7.5% of your adjusted gross income are allowed. This means an individual with an adjusted gross income of $40,000 can only deduct medical expenses above and beyond $3,000.
In order to exceed this minimum amount, you could prepay your orthodontia bill or pay your January 1 medical insurance on December 31. Doctors' visits and prescriptions are not the only medical expenses you can take. Any special equipment or treatments you receive are also deductible. If you have a medical condition that can be helped by a sauna or a whirlpool, those items are deductible. If you use your car for trips to the doctor, keep a record and deduct 10 cents a mile for tax purposes.
Deductible medical services can be performed by someone other than your doctor. If you have a condition like a bad back and your doctor says you need a daily massage, this treatment is deductible. Make sure you get a written note from your doctor saying you need those services.
5. A hefty tax deduction may have four wheels
Many car owners do not realize that donating a car can give you a guaranteed tax deduction. Not only does a car donation help those in need, it eliminates the hassle of selling your car yourself and gives you a tax deduction. If you donated a vehicle to a charitable organization in 2004, you can deduct the fair market value of the car. The fair market value of a vehicle can be found on Web sites such as the "Kelley Blue Book" (www.kb.com). However, this fair market value rule changes this year. If you donate a vehicle on or after January 1, 2005, you are only allowed to deduct the amount the charity receives when it sells it;not the fair market value of the vehicle.
As for all tax issues, contact your tax professional for more information on deductions.