Important Tax Deductions
Keeping records, being diligent, and itemizing are keys to saving money.
By David Yeske, CFP

Studies have found that millions of Americans overpay their federal income taxes because they don't itemize, they overlook deductions, they keep inadequate records, or they fear being audited. Below is a list of some major deductions you may be missing. Dig for every deduction you're entitled to, and talk with a tax accountant or financial planner if necessary.

Retirement plans. For those of you still working, contributing to an individual retirement account (IRA) or qualified retirement plan remains one of your best tax deductions.

• The maximum deductible contributions you can make rose in 2002, up to $3,000 for an IRA and $11,000 for a 401(k), 403(b), or similar plan.
• Taxpayers age 50 and over can kick in an extra catch-up amount of $500 to an IRA and $1,000 to a 401(k) or similar plan.
• If you and your spouse have an adjusted gross income (AGI) of no more than $30,000 ($15,000 for singles) for 2002, you may qualify for a credit of up to $1,000 against contributions made to your qualified retirement plan. This is in addition to the normal deduction you receive for such contributions.
• You generally have until April 15, 2003, to contribute to your qualified retirement plans and claim the contributions on your 2002 return.

Small businesses. Any small-business owner who bought new property for his or her business can take an up-front 30 percent bonus depreciation under the Job Creation and Workers Assistance Act, enacted in 2002 and ending Sept. 11, 2004. The property must be new, have a class life of less than 20 years, and have been bought after Sept. 10, 2001.

Ask your accountant or financial planner if you qualify for a deduction on your home office also.

Disaster relief. Summer wildfires and floods caused extensive damage in 2002. If you suffered unreimbursed casualty losses, you might qualify for a tax deduction if the losses exceed 10 percent of your AGI.

Charitable work. You can't deduct the value of the time you donate to your favorite charities, but you can deduct mileage and any out-of-pocket expenses associated with it, such as parking fees.

Medical expenses. These are deductible only if they exceed 7.5 percent of your AGI. People whose incomes are smaller than in past years may find that more expenses qualify this year. Medical deductions include:

• a portion of your long-term care premiums, depending on your age;
• 70 percent of your health insurance premiums, if you are self-employed;
• small items that add up, like eyeglasses and mileage to the doctor's office;
• home modifications made for medical purposes; and
• medical expenses you paid for your parents.

Investments. Calculate investment gains and losses carefully. Mutual funds can be tricky, and there are different ways to calculate them. Don't forget to include unused capital loss deductions carried forward from previous years.

Education. If you have children in college, you can take all of the following deductions:

• up to $3,000 for tuition, if your AGI is less than $130,000 ($65,000 for single filers);
• up to $2,000 (increased from $500) on your contribution to your 2002 education savings accounts (contributions made by April 15, 2003, can be included on your 2002 return); and
• the interest on student loans.

You probably missed some deduction opportunities because you didn't make certain tax moves before the tax year ended. Examples are bunching deductible expenses or opening a solo 401(k), which has become an attractive way for the sole business proprietor to save for retirement. Mark your calendar and review your 2003 taxes before the year ends.