Each year as the time comes again to prepare and file an income tax return, many people look and look to find the most deductions to reduce the amount of taxes they owe or to increase the amount of their refund. Here is a compilation of some useful but oftentimes overlooked, tax deduction tips that many people can qualify for.

For the younger taxpayers out there who may have just gotten their first job this year and had to move more than fifty miles to get that job, you can write off the expense of traveling and moving to that new place. That’s right, you can write off the costs of driving your own car and moving your own belongings, to include a set amount per mile driven plus any tolls and parking fees paid on the trip.

Also, for the parents of students going off to college this year, there is the Hope Credit which applies to students in their freshman and sophomore years in college. It provides up to $1800 in tax credits. There is also the newer American Opportunity Credit which provides up to $2500 in tax credits for parents of students who are in years one through four. Basically the same as the Hope Credit, only it is applicable to the first four years of a student’s college education. If student loans are involved and the student’s parents pay back the loan, the IRS sees it as the money being given to the child, who in turn paid back the loan. Any child not claimed as a dependent is eligible to deduct up to $2500 of the interest on student loans that their parents paid.

If you made any energy saving home improvements last year, be sure to list them. You can get up to 30% of the total spent on those home improvements back. These credits apply to many qualifying, energy saving home improvements such as windows and doors, solar lighting panels, heat pumps and many, many other such home improvements. Beautify your home and make it more environmentally friendly and the government will give you back up to 30% of what you spent, not a bad deal.

Child care credits are sometimes overlooked if they are paid through an account at your work known as a reimbursement account. Up to $5000 worth of child care expenses can be paid through the reimbursement account but if you spend more, then you may be eligible to claim credit for up to $1000 more in the form of a credit.

Another often overlooked tax deduction is for any charitable expenses you paid out of pocket. Mostly, you won’t forget to deduct those large, payroll deducted, annual contributions but what about the little contributions? Have you ever given any food like baked goods to the local nonprofit soup kitchen? Or helped out with a local school’s fundraising efforts by buying school supplies? All of those things can be deducted as charitable contributions, no matter how small the amount. It’s good to know that you can make a difference when helping others and be rewarded yourself in the process.

One of the defining characteristics of the American tax code is that it is specifically designed to encourage behavior that the government believes are productive and desirable. Not surprisingly, this includes higher education which leads to a better educated and more productive society and workplace. Therefore there are a host of different tax credits and deductions that relate to expenses associated with higher education. However, like all programs administrated by the Internal Revenue Service (IRS), it can be challenging to determine what expenses are covered by each credit or deduction and what can – or can not – be claimed. The basic rules are presented in IRS Publication 970, which runs to ninety-nine pages in PDF format for 2009. In 2009, the most education expenses can be claimed against your tax liability by using the three primary tax credits: the American Opportunity Credit, the Hope Credit, and the Lifetime Learning Credit.

The American Opportunity Credit (AOC) requires you to meet two primary conditions before you can claim it. First, you have to pay the qualified education expenses yourself, for either yourself or an eligible student (which includes yourself, your spouse, or a dependent that you claim on your annual tax return). Second, you cannot be claiming the Hope Credit (see below) for any student for the same year. You cannot claim the AOC if you: (a) file as married, filing separately; (b) you are listed as an dependent; (c) your modified adjusted gross income (MAGI) is $90,000 or higher (or $180,000 or higher if married and filing jointly); (d) if you or your spouse were a nonresident alien during any part of the year; (e) if you claim the Lifetime Learning Credit or the tuition and fees deduction for the same student in the same year; or (f) if you claim the Hope credit for any student during the year. The maximum limit of the tax credit is $2,500 and all the relevant information is provided in IRS Publication 970.

The Hope Credit (HC) is an older tax credit that has been replaced by the AOC (see above) for most students, though the Hope Credit is still applicable to students attending schools in the federally-declared Midwestern disaster areas. The basic requirements to still qualify for the Hope Credit are that the student has to be attending a qualifying institution of higher learning in the Midwestern disaster area and you cannot be claiming the AOC. The Midwestern disaster areas include a defined list of counties in several states: Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska and Wisconsin. The complete list is provided in IRS Publication 970. This tax credit has a higher limit that the AOC, covering up to $3,600 in qualifying expenses. Like all tax credits, the terms and conditions are complicated and so a comprehensive review of Chapter 3 of IRS Publication 970 is a good idea.

The third primary tax credit is the Lifetime Learning Credit (LLC). This credit has much the same qualifying conditions as the AOC, except that it can be claimed against expenses beyond the first four years of college and there are no set limits on how many years the credit can be claimed. This is somewhat offset by the fact that the credit is smaller, reaching a maximum of $2,000; although this is doubled for students in the Midwestern disaster areas described above. The overall terms and conditions for the LLC are easier, so this is probably the best tax credit for many people to explore. Chapter 4 of IRS Publication 970 provides all the essential information.

The American tax code is an extremely complex body of laws and regulations that really requires a degree of expertise to get the most out of the opportunities contained within it. Of course people with very simple tax situations do not necessarily need professional assistance, but then again their ability to maximize their refunds or minimize their liabilities is also very limited. For people with more complicated tax situations, there are a lot of options available to get the most from their annual tax filing.

After the adjustments – or amounts deducted from the gross income in order to give an adjusted gross income (AGI) – the next step is to determine which deductions to claim. Deductions are amounts that are subtracted from the amount due on each person’s tax return. Like everything else related to the American tax system, deductions can be complicated and tricky and claiming deductions that you are not entitled to can be costly if the problem is caught by the Internal Revenue Service (IRS). Therefore it really pays to understand the deductions, how they work, and if the qualifying conditions are met.

The first choice the taxpayer is confronted with is whether to claim the Standard Deduction or if it is more beneficial to itemize deductions. The Standard deduction is much simpler to file for and requires only basic documentation to substantiate if audited by the IRS. Itemized deductions offer a lot more opportunities to save money, but are also more time consuming and demand copious documentation in order to substantiate the claim. The proper way to determine the right option is to work out the total deduction amount available using both the Standard Deduction and itemized and then choosing the appropriate one. However, this is twice as time consuming, so many individuals just opt to take the Standard Deduction and be done with it.

People that have extremely complicated tax situations – high income, multiple financial investments, real estate, and so on – can frequently benefit by itemizing, but few choose to do the work themselves, instead hiring an expert to do it. Similarly, self-employed people, businesses, and other entities usually opt to itemize since there are many deductions that are only available through itemization. One of the consequences of the American tax system being progressive is that it is specifically designed to encourage specific behaviors and investments, and especially things related to small business and entrepreneurship. Therefore, people engaged in such activity should probably itemize, though they should also use the services of a professional to do so.

The real danger of maximizing deductions is that it is very easy to misunderstand or misread how the deduction works, resulting in an erroneous claim. Further, the IRS generally begins with the assumption that all errors are deliberate and thus subject to penalties and interest. The IRS uses a lot of terminology that can be tricky because the strict IRS definition of these common terms is not the same as the popular understanding. For example, the idea of a “business expense” appears fairly straight forward and most people believe they can determine what is – or is not – a ‘business expense.” However, the IRS has a very strict and well documented definition of what constitutes a “business expense” that may not be the same as the common sense definition of the term. Further, not all “business expenses” – as defined by the IRS – are treated the same and can be claimed the same way, so there is a lot of room for error.

Like it or not, the American tax system is extremely complex. The tax code alone runs to many thousands of pages and the additional regulations run to many more thousands of pages. The result is one of the most complicated tax systems in the world and many people spend their entire professional careers learning how to handle different aspects of the tax code and selling this expertise to people that have neither the time nor the interest to become experts themselves. Of course anyone is allowed to fill out their own tax returns, and if the person’s tax situation is very simple – people that qualify to use the 1040EZ and choose to do so – there is generally no harm in this.

However, the more complicated the tax situation becomes; the more important it is to at least consider hiring a professional. Many people end up getting themselves into trouble with the Internal Revenue Service (IRS) simply because they decide to file their own returns without understanding how everything actually works. For example, many deductions have relatively self-explanatory names – like “business expenses” – but these terms have very strict and well defined meanings in respect to taxes which may not include everything that common sense says is a “business expense.” Further, many deductions have very specific limitation on what can or cannot be claimed, and while an expert may know and understand what these limits are, a layman may not. In either case, if a person claims a deduction or credit that they are not entitled to, they may face penalties and other punitive measures.

Another reason that an expert may be useful is because the tax code and various limits and conditions change each year. For example, just because a person qualified for a particular deduction in one year does not mean they qualify for the same deduction the next year. Similarly, there are also usually a number of one time, or temporary, deductions or credits that only apply once. There are so many changes that many major tax forms change each year, so the IRS usually only issues the tax forms for a particular year a few months in advance of the April 15 due date. Keeping track of all of these changes and modified limits can be very time consuming, but most experts do this as a matter of course, so it is no problem for them.

Finally there is simply the matter of maximizing the tax benefits: maximizing the amount of a refund or minimizing the amount owed to the IRS. The whole notion of deductions and tax credits is very complicated. There are so many options available and each of them has very strict guidelines that have to be met in order to claim them. This is true even for basic claims that people think they understand – like dependents – even if in reality they do not understand specifically what the IRS means by these terms. The result is that in many cases a tax professional can not only help the taxpayer avoid getting themselves in trouble, but can also help them get a better return than they would have been able to come up with by themselves.

Generally speaking, the Internal Revenue Service (IRS) does allow tax payers to deduct the costs associated with their tax preparation as a miscellaneous deduction on Schedule A (Itemized Deductions) of the form 1040. However, as is the case with most things related to tax deductions, this deduction does have specific limitations and restrictions. Further, there are new changes that have been introduced for the 2009 tax year that may deny you this deduction.

Deductions related to your tax preparation may include any money paid for reasonable and ordinary expenses related to preparing your taxes. These may include, but are not limited to: the cost of tax preparation software; fees paid to a professional tax preparer, planner, or attorney; electronic filing of your return; publications and reports purchased to aid in calculating your taxes; and expenses related to traveling to your tax professional’s office. Basically, any expense paid for the “determination, collection or refund” of federal, state, or local taxes can be deducted as a miscellaneous expense.

As is the case with all itemized deductions, in order to claim your tax preparation expenses you have to file the standard Form 1040 along with Schedule A. Further, you have to be able to substantiate your deductions; which means keeping your receipts and other evidence of the expenses you are claiming a deduction for. Further, in 2009 there is a new change which restricts the number of miscellaneous deductions that can be claimed by people that have an adjusted gross income (AGI) of $166,800 or more (or $83,400 if married filing separately). To see if your miscellaneous deductions are restricted under this new policy, the IRS provides a worksheet in the Schedule A instructions – related to Line 29 – which can be filled out to see if you can claim miscellaneous deductions in 2009.

Further complicating the picture is the fact that most miscellaneous deductions – including tax preparation expenses – are subject to an exclusion that is equal to two percent of the taxpayer’s AGI. That is, if the deduction does not equal or exceed two percent of the taxpayers AGI, it cannot be claimed and only the amount that does exceed two percent can be deducted. For example, if you have an AGI of $50,000, you could only claim tax preparation expenses that exceed two percent of the AGI, or those that exceed $1,000. Although this two percent exclusion does not apply to all miscellaneous expenses, it does apply to tax preparation expenses. One final complication is that only the expenses related to your personal tax preparation can be claimed on Schedule A; tax preparation fees related to other entities (businesses, rental properties, or farms for example) have to be reported on their appropriate schedules with the 1040.

Therefore, while it is true that expenses related to tax preparation can be deducted from your annual tax return, this does not mean that all such expenses can be deducted and it does not mean that all people can claim these deductions. Due to the two percent AGI exclusion, this deduction is frequently limited to wealthy people with complex tax situations.

Prior to 2008, the real estate market was essentially the prime driver of the United States economy after consumer spending. The housing bubble began to burst in 2008 and the subsequent collapse of the housing market continues to be a major problem into 2010 and is project to remain so through 2011 at the earliest. As a consequence, the United States government has passed several different measures extending tax credits to both first time home buyers and long time home owners in an effort to boost the housing market.

The first measure was the Housing and Economic Recovery Act of 2008, which created a tax credit for first time homebuyers of up to $7,500. Contrary to some of the information being circulated online, this tax credit was not a traditional tax credit which is paid out without an obligation to pay it back; instead it operated much like an interest free loan from the federal government and has to be paid back gradually over the next fifteen years. This initial measure only related to homes purchased between April 8, 2008, and before Jan. 1, 2009 and only first time homebuyers could qualify, specifically defined as people that had not owned a primary residence for the previous three years. This measure only met with limited success because at the time most residential property values were actively declining, meaning that very few people were willing to buy new homes until the market bottomed out.

Due to the limited success of the first law, the terms were significantly changed through the American Recovery and Reinvestment Act of 2009 (and supplemented by the Worker, Homeownership and Business Assistance Act of 2009). These increased the potential tax credit to $8,000, and extended the time period from January 1, 2009 through May 1, 2010. Further, these additional measures dropped the first time home buyer requirement, extending the credit to long time homeowners, defined as people who have owned a primary residence consistently for five years prior to buying their new home. The fact that most American real estate markets have already bottomed out and that long time home owners – those most likely to qualify for a new mortgage loan in the current climate of tight credit – means that most analysts believe these new measures will be much more successful.

People wishing to claim this credit have to file a paper return and include the special Form 5405 and the required supplementary documentation required by the 5405. The precise guidelines governing who can, and can not, claim the tax credit are provided both on the Internal Revenue Service (IRS) website (www.irs.gov) as well as with the instructions accompanying Form 5405. There are details conditions relating to when you bought your home, your personal filing status, the value of the home in question, the amount of your annual income, who you purchased the home from, your age at the time of the purchase and many others. Therefore anyone considering claiming the credit should take the time to carefully read over all the requirements first.

The tax credit can been very advantageous, and since it is credited back immediately, can serve as a down payment for some home purchases.

It should come as no surprise to anyone familiar with the American tax system that it can be a rather complicated matter to determine whether or not your child in college can be claimed as a dependent for purposes of your annual tax return. There are a series of factors that have to be taken into account to make this determination, so while one parent may be able to claim their child in college as a dependent, another parent may not be able to. It all depends on the individual circumstances of the child and the parent as well as their filing status and other related matters.

The first determination that has to be made is whether or not the child qualifies as a student according to the definition set by the Internal Revenue Service (IRS). This definition mandates that the child must be enrolled as a full-time student for at least five calendar months of the year, or enrolled in a government operated full-time on-farm training course. A qualifying school may be either an academic, trade, technical or mechanical one. However, on-the-job training courses, correspondence schools or online schools do not qualify as far as the IRS is concerned.  Therefore students of an online school, even if it is fully accredited and legitimate, are not considered students by the IRS and cannot be claimed as such on the parent’s tax return.

Assuming the child qualifies as a student in the view of the IRS, the next step is to determine whether or not they meet the threshold of a qualifying child. A qualifying child may be a son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of those listed previously. For a college student as defined above, the qualifying child must be under the age of twenty-four and younger than you and your spouse (if filing jointly). There are also three more stipulations that must be met in order for your child in college to qualify: (a) the child cannot have provided half or more of his or her support through the year in question; (b) the child cannot be filing a joint tax return on his or her own behalf; and (c) the child had to have lived with the parent filing at home for at least half of the calendar year. There is an exception to this last qualifier for special circumstances.

If your child in college meets all of the above terms and conditions, you should then proceed to the worksheet provided in the instructions of the Form 1040 used to determine whether or not you can claim the child as a dependent. Step two of the work sheet determines whether or not the child can be claimed as a dependent based upon three more conditions. These additional conditions are: (a) the child must be a US citizen, resident or resident alien or one of Canada or Mexico with an exception for adopted children; (b) the child should not be married, though again there are exceptions to this rule; and (c) the parent, or person wanting to claim the child as a dependent, cannot be claimed as a dependent by anyone else. This last relates to qualifying as a dependent to someone else, regardless of whether or not that someone else makes the claim. If you can be a dependent to someone else you are not allowed to claim anyone else as your own dependent.

On January 12, 2010, Haiti – already the poorest and least developed country in the Western Hemisphere – was hit by a massive 7.0 Mw earthquake. This resulted in one of the largest humanitarian disasters in recent history, with more than 225,000 people being killed, 300,000 be injured and more than a million people being left homeless. To make it worse, as of January 24 there had been 52 aftershocks measured at 4.5 Mw or higher, resulting in ongoing mass panic and destruction. The earthquake destroyed much of the country’s infrastructure, including many government buildings and hospitals, making relief efforts even more difficult. The world has rallied to Haiti’s relief, with a massive influx of humanitarian aid coming in from all around the world.

As the United States tax system is designed as a progressive system, it is actively used to promote activity that the government deems beneficial to society. This means that tax credits and deductions are provided to encourage desirable behavior and tax penalties are created to discourage undesirable behavior. Among those activities that the tax code promotes is charitable donations. Generally speaking, cash contributions to properly registered charitable organizations can be deducted from a taxpayer’s annual income tax liability for the year in which the contribution was made including many of the organizations that are helping Haiti since the earthquake.

Under normal circumstances, since the earthquake occurred in January of 2010, people would not be able to deduct any charitable contributions they made on behalf of Haiti until they filed their 2010 tax returns. However, due to the devastation faced by Haiti and as a means of encouraging more active giving on behalf of Haiti, Congress enacted a special law allowing people to deduct charitable contributions for earthquake relief from their 2009 tax returns. H.R.4462, passed by Congress on January 22 allows contributions specifically earmarked for earthquake relief made between January 11, 2010, and March 1, 2010 to be deducted from the taxpayer’s 2009 tax return.

Since the earthquake and the subsequent legislation occurred after the 2009 tax forms had already been produced and released, in order to claim this deduction all qualified donations are to be treated as though they were made on December 31, 2009. As is the case with all itemized deductions, the taxpayer must file a “long form” 1040 (or 1040NR) as well as itemize their deductions on Schedule A to be attached to the form 1040. The other requirements are essentially the same as any other charitable contribution deduction, namely it must made to a qualifying charity. However, it is important to note that in order to qualify for the 2009 deduction, the specific fund donated to must be explicitly designated for Haiti earthquake relief.   

Special allowances have also been made to allow people to claim the deduction if the contributions was made over the phone or through text messaging as well. Basically any phone bill or receipt that shows the name of the organization donated to, the date and the amount of the donation will satisfy the recordkeeping requirements of the IRS.

The rise of the Internet has resulted in a boom of home businesses, usually based on some sort of Internet related activity. At the same time there has been a proliferation of outfits promoting what the Internal Revenue Service (IRS) defines as “abusive home-based business tax schemes” or schemes that sell the notion that by claiming a home-based business you can then write off many of your regular household expenses as business expenses. This is most assuredly not the case and since these schemes have become so prevalent, the IRS is now aggressively auditing and investigating business deductions based on home business expenses.

The basic guidelines for the tax treatment of your home-based business are given in IRS Publication 587 (online at: www.irs.gov). This document, coupled to an extent with IRS Publication 334 (the Tax Guide for Small Business) should provide you with the information you need to differentiate between legitimately deductible business expenses and non-deductible household expenses. The first section of IRS Publication 587 provides a comprehensive list of requirements that have to be met in order to qualify for a home-based business deduction and they are comprehensive. Just as an example, the area defined as the business area has to pass the “exclusive use test”, meaning that the area set aside for your home office has to be used exclusively for this purpose and cannot be used by either yourself or other members of the household for any other purpose.

Further, even if your home office meets all the initial qualifying tests, the possible deduction may be only partial in nature. Contrary to the claims of some of the online promoters of abusive tax schemes, there is no way to claim your home mortgage payments or whole utility bill as a business deduction if you live in the home in question. IRS Publication 587 provides a simple to follow flow chart (Figure A) that can walk you, step-by-step, through the various tests for qualification; but even if you do qualify it does not mean that the whole expense can be written deducted. One of the examples given in the publication specifically notes that if one room of your house is used for the business and otherwise qualifies and your house has ten rooms, then you can only claim ten percent of the household expenses as a deduction.

The IRS is actively pursuing abusive home-based business tax schemes today and regardless of the advice you received from some online promoter, it is you – not the promoter – that will be held liable for making false claims on your business return. In that the IRS is actively campaigning to stamp out this form of tax evasion, the penalties can be quite high and egregious abuse may even result in criminal prosecution and imprisonment. Therefore it is a good idea to study the relevant IRS publications as opposed to the claims made by promoters before deciding whether or not to attempt to claim deductions based on your home business. Further, as the IRS is actively pursing this matter, even if all of your deductions are completely legal and correct, just filing them significantly increases your chances of being audited.