Spending a little bit of time thinking about your expenses for the year might lead to lower taxes. We often see taxpayers cheat themselves when it comes to the following:
- Medical expenses for themselves and their dependents. These are harder to deduct for federal income tax purposes than in the past. First you must not be taking the standard deduction and then expenses must exceed 10% of adjusted gross income (for those born before 1/1/52, 7.5%). For New Jersey, however, the threshold is 2% of New Jersey gross income. Expenses include everything from eyeglasses and hearing aids to long term care insurance. A partial list of deductible expenses can be found at: https://www.irs.gov/taxtopics/tc502.html
- Charitable contributions. These must be made to a qualified charitable organization but include more than monetary donations. Again this deduction is not available when the standard deduction is used, but charitable contributions include donated goods like food donated to a charity, the use of a vehicle for charitable purposes (14 cents per mile in 2016), and donations of appreciated property to a charity. Proper documentation of the timing and amount of the donation is essential. Political contributions are never deductible. There is an Exempt Organization checker on the IRS website to determine whether a charity is an eligible recipient. There is no charitable deduction for New Jersey taxes but you may make a charitable contribution to select charities through your tax return.
- Child and dependent care expenses. A portion of expenses paid for the care of a qualifying individual to allow a taxpayer (and spouse, if married) to work are eligible for a non-refundable federal tax credit. A qualifying individual is generally a child (under age 13 at the time of care) or a dependent or spouse who is physically or mentally unable to care for himself and who lived with the taxpayer for over half the year. The institution or individual providing the care must be identified by tax identification number. Day camp (but not overnight camp) expenses qualify for this credit.
- Miscellaneous itemized deductions are deductible on a federal return if the standard deduction is not taken but most are deductible only to the extent they exceed 2% of the adjusted gross income on a return. Many of these deductions include expenses related to the generation of income like: job hunting expenses, unreimbursed employee and home office expenses, tax preparation fees, safe deposit box fees or the cost of installing a home safe, union and professional dues, some legal fees, and investment expenses. This is probably the most overlooked category of deductions so when in doubt, ask your tax preparer.
- Gambling expenses are deductible ONLY by taxpayers who itemize their deductions and only to the extent of gambling winnings. If expenses can be substantiated, they are miscellaneous itemized deductions that are not subject to the 2% floor. For the State of New Jersey gambling winnings are reported net of losses.
If you need a tax organizer to help you identify other opportunities you might be missing, contact your tax preparer as soon as possible.
