Where the tax savings are: Detailing deductions

Gayle B. Ronan • E-mail

With the start of the new tax year, the hunt for tax-lowering deductions and credits is officially on. But new opportunities are scarcer this year.

One makes mortgage insurance premiums deductible. But hold off on any celebration. It applies only to mortgages taken out in 2007, said Donna LeValley-Cocovinis, contributing editor of "J.K. Lasser’s Your Income Tax Guide 2008." Insurance premiums paid on mortgages taken out in earlier years are disqualified.

The deduction also begins phasing out at adjusted gross income levels of $100,000 for couples, and at $50,000 for singles.

Another change offers a credit of up to $5,000 for first-time homebuyers ... but only in Washington, D.C. It plays to such a narrow audience that cynics dubbed it the "freshmen congressmen" credit. But it phases out at income levels somewhat below what the average member of congress probably reports.

A homeowners’ credit with a much broader application, though in its final year of availability, is the residential energy credit. This is a "gift" for anyone who did not exhaust the $500 maximum credit in 2006 and made qualifying repairs in 2007. Such repairs would have improved energy efficiency — whether done intentionally or out of necessity. With new windows and doors among the qualifying improvements, the credit offers a low threshold for accessibility.

While new deductions and credits may be scarce this year, there are still plenty of opportunities for reducing taxes.

Here is a sampling of some of legitimate tax reduction opportunities identified by tax experts including attorney Barbara Weltman, author of "J.K. Lasser's 1001 Deductions and Tax Breaks 2008":

Losing bets
What goes on in Vegas not only stays in Vegas, it may be deductible.

“Losses on lottery tickets, racing and even casino gambling can be used to offset gambling gains if the paperwork is maintained,’’ says Weltman. This is helpful since gambling-related winnings are fully taxable as ordinary income.

But while some tax good can be found from holding onto losing lottery tickets, gambling losses can only be used to the extent they offset winnings. If they exceed winnings, they cannot be used to offset ordinary income the way losses realized on stock investments can be, for example.

When charity begins at home
It is not just the checks written to qualifying charities or donations of gently used clothing and household items that may be deductible. Charitable gestures may also be, such as a portion of the expense of hosting an exchange student if a qualifying not-for-profit organization facilitated the program.

Just leaving home for charity may also be deductible.

“You can take a deduction for the mileage you incur in performing [qualified] charitable work,” confirms Dan Fuller, senior tax director in the Grand Rapids, Mich., office of BDO Seidman LLC. “Many in our area for example, have made trips to New Orleans in the last year as volunteers for various charitable organizations. At 14 cents a mile, that can add up.”

Bogus tax breaks While there are legitimate ways to reduce taxes, here are a number of items that individuals believe are deductions but in reality are not. — Child support payments — Commuting expenses — Country club memberships — Cosmetic surgery — Expenses related to earning tax-exempt income — Health spa expenses — Life insurance premiums — Lost or misplaced cash or property — Lunches with co-workers — Over-the-counter medication, even if prescribed Source: J.K. Lasser’s 1001 Deductions & Tax Breaks 2008

While donations of money to charitable causes are typically deductible, donating something more personal, like blood, is not, according to Weltman. Nor in this season of presidential primaries, is a donation to a political campaign.

For more information on taking charitable deductions see IRS Publication 526.

Do not count medical expenses out
Because medical expenses are only deductible to the extent they exceed 7.5 percent of adjusted gross income, the relatively healthy and well-insured tend to assume there is little point in adding up their out-of-pocket expenses each year.

”But people often don’t realize how much they can legitimately include in order to reach that level,” says Fuller.

This is especially true for those who contribute to their parents’ medical expenses. While Mom’s or Dad’s Social Security income may prevent them from qualifying as dependents for tax purposes, adult children paying more than half of their parents’ financial support, including any qualifying medical expenses, may be able to add those expenses in with the rest of their household’s when calculating the medical expense deduction.

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