- Days left

5 tips for maximizing tax deductions

When it comes to deductions, many taxpayers miss out -- not because they don't qualify for the deductions, but because they fail to keep good records. It's often difficult to remember on April 15 all of the miles you've driven, charities you've supported and taxes you've paid. Here are five tips for maximizing your tax deductions throughout the year:

1. Don't pay in cash. Sure, I know cash is convenient. But it's also practically guaranteed to be forgotten come April 15, unless you're one of those folks who's great at writing down every single purchase. In some cases, such as charitable donations, if you fail to get a receipt when you pay in cash, your deduction won't be allowed. When possible, write a check or use a credit card to substantiate purchases for doctor's visits, charitable donations and business expenses; the IRS considers a canceled check or credit card receipt to be appropriate for purposes of record-keeping. Better yet, you're more likely to track every single dollar.

2. Use cover letters. Long gone are the days of writing real letters. But for some items, such as charitable donations, it's a great way to document your contribution and likely ups your chances of receiving a written response. The written response is important: For certain donations, you'll need an acknowledgment from the charitable organization in order to take the deduction. I know it feels old-fashioned, but I use cover letters all the time, especially for non-cash contributions. This fall, I shipped children's books to a library and candy to a homeless shelter with cover letters detailing what I was sending; one sent a generic "thank you for your contribution" letter, the other a handwritten note. Substantiating deductions this way is key to maximizing what you can deduct.

3. Scan in your receipts
. Every taxpayer has his or her own system for keeping track of receipts. Some taxpayers store their receipts in file folders; others in plastic totes. It doesn't matter, so long as receipts are easily accessible and properly documented.

One of the easiest ways to get organized -- and not have to sort through piles of receipts -- is to scan in your receipts, using a product like Neat Receipts. The IRS has accepted scanned receipts since 1997 (Rev. Proc. 97–22 outlines the criteria). Basically, your scanned or electronic receipts must be as accurate as your paper records. If you scan receipts, you'll need to have your records organized and be able to produce them in a hard copy form if needed. Having your records organized and in one place lessens the chance you'll forget something come tax time.

4. Don't undervalue your charitable donations. While donations of non-cash items over $5,000 require a formal appraisal, donations of non-cash items under that amount must be valued using one of several approved methods. A common method of valuing items like used clothing and furniture is to use the "thrift shop value" -- an estimation of what the value of the item would sell for at a thrift shop.

When you donate items, list them as best you can (i.e., "Jones New York ladies' dress suit" or "10 hardback children's books") and put a corresponding value to each item or group of similar items. Lumping them together as "bag of children's toys" will probably result in the value you report being less and probably won't pass muster with the IRS. Separately stating the items helps you calculate the most appropriate value of your donation.

Believe it or not, I've found that most taxpayers under-value, rather than over-value, the items being donated. To make sure you're maximizing your charitable deductions, consider using a third party to help out. TurboTax offers an application with its software that will help you value items you've donated. I also find this list of commonly donated items and their estimated thrift shop values helpful.

5. Use an app for that. When it comes to tracking mileage for business, charity, and medical purposes, many taxpayers miss out because they fail to keep good records. If you drive 1,000 miles for business, you'd be entitled to a $500 deduction. Those weekly trips to donate your time for a charitable purpose? At 10 miles each way, you could be deducting an additional $145 for the year.

The best way to maximize your mileage records is to keep good records. A tried and true method is a mileage log, best kept in the car, where you write down odometer readings when you go on a trip for business, charity, or medical reasons.

But, if you're always looking for a pen in the car, or you're terrible at remembering to check the odometer before setting off, consider adding some technology to your record keeping. A new app for the iPhone, automilez, generates mileage logs after each trip -- and it's free (just download it from the Apple store). The app is GPS mileage logging and online log management service, so it measures your mileage for you -- you just have to say what it's for. If you use the pre-selected categories, it will even calculate the total tax deduction for the trip, and the app will email you the data. If you don't have an iPhone, don't fret: automilez for Blackberry, Windows CE, Palm Pre, and other platforms are in development.

You can also keep track of your mileage online using Logbook. Logbook, offered by the same company, allows you to track and store mileage online. Since it's Web-based, you don't need an iPhone or Mac to use it.

The bottom line when it comes to maximizing tax deductions: You can't claim what you haven't donated, paid or spent. There's no magic trick that will suddenly grow your deductions on April 15. But you should make every effort to document what you've done during the year so you don't miss out on deductions you're entitled to. Proper record keeping throughout the year means you won't miss out on deductions that can slash your tax bill next tax season.

Increase your money and finance knowledge from home

Intro to different retirement accounts

What does it mean to have a 401(k)? IRA?

View Course »

How much house can I afford

Home buying 101, evaluating one of your most important financial decisions.

View Course »

TurboTax Articles

Employer Sponsored Health Coverage Explained

The Affordable Care Act, also known as Obamacare, is simpler than some people may give it credit for. The basic rule to remember is that everyone must carry Minimum Essential Coverage (MEC) or pay a penalty. Employers with 50 full-time employees or more are obligated to sponsor plans for their workers to help them meet this requirement.

How to Report RSUs or Stock Grants on Your Tax Return

Restricted stock units (RSUs) and stock grants are often used by companies to reward their employees with an investment in the company rather than with cash. As the name implies, RSUs have rules as to when they can be sold. Stock grants often carry restrictions as well. How your stock grant is delivered to you, and whether or not it is vested, are the key factors when determining tax treatment.

What is a Schedule Q Form?

The Internal Revenue Service (IRS) has two very different forms that go by the name Schedule Q. One of them is for people who participate in certain real estate investments; this is known as a Form 1066 Schedule Q. The other Schedule Q deals with employer benefit plans. It?s not something an individual taxpayer would normally have to deal with, though a small business owner might need it.

Incentive Stock Options

Some employers use Incentive Stock Options (ISOs) as a way to attract and retain employees. While ISOs can offer a valuable opportunity to participate in your company's growth and profits, there are tax implications you should be aware of. We'll help you understand ISOs and fill you in on important timetables that affect your tax liability, so you can optimize the value of your ISOs.

Add a Comment

*0 / 3000 Character Maximum