The most overlooked tax deductions

By Matthew Schifrin and Tina Russo

updated 2:37 p.m. ET March 28, 2007

If you are the type who likes to tough it out during tax time by digging into a guidebook or clicking your way through tax preparation software, one of the first things you will notice are the volumes of information devoted to tax deductions.

In Ernst & Young's 750-plus page 2007 Tax Guide for example, more than 150 pages of the manual are devoted to the nitty-gritty of tax deductions.

Tax deductions, of course, are expenses that the IRS says you can use to reduce the amount of your taxable income — things such as health care expenses, contributions to your favorite charities and the mortgage interest you pay on your home.

However, did you know that you can claim a depreciation deduction for your fancy mobile phone, provided that you own it for the "convenience of your employer" or if it is required as a condition of employment? And what about the cost of having lead paint removed from the walls of your playroom? These expenses are also deductible, as are costs like travel bills and phone calls you incur while looking for a new job.

In fact, the accountants at Ernst & Young have put together a listing of the dozens of deductions that many taxpayers and even experts tend to overlook. The list ranges from the cell phone depreciation deduction to the cost of maintaining a safe deposit box at your bank to fees you pay to your investment adviser.

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As always, taxpayers need to read the fine print on all allowable deductions and, if possible, consult a tax expert or reliable tax guide. For example, say you are a shareholder of Google or Berkshire Hathaway and would like to attend the company's annual meeting. Normally, you would not be able to deduct your travel expenses to Northern California or Omaha. However, if you are a significant shareholder of a smaller-cap company like wireless connectivity provider iPass and intend to present a legitimate resolution at the meeting to unlock shareholder value, the cost of getting to California for the meeting would be an allowable deduction. In this case, a deduction for travel is allowed if your attendance could make a significant impact on your income or investment.

And for those of you who frequent Las Vegas or take a chance on state lottery tickets on a regular basis, the Internal Revenue Service requires that you report the full amount of your gambling winnings as income on line 21 of your 1040. However, if you are a winner, you can deduct your offsetting losses (up to the amount of your winnings) on IRS Schedule A. Most important, you must remember to keep good records such as losing keno, lottery or racetrack tickets. In the case of casino gambling, you should keep a diary, including information like slot machine or table number, and the names of people who were present when you lost money.

Of course, not everyone should itemize deductions. If the standard deduction exceeds your itemized tally, you should obviously opt for the IRS's amount. Also, those subject to the dreaded Alternative Minimum Tax should bear in mind that most deductions — like those for employee business expenses — are disallowed.

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