Each year, the Internal Revenue Service reports the most common mistakes made on personal income tax return. There are numerous ways to make errors and the most costly is a missed opportunity to take a deduction. If you are one of the 48 million people that itemize deductions on Form 1040, and even if you previously took the standard deduction, review the list below and take advantage of more deductions to which you are entitled.
You will need:
• Internet connection
• Receipts reflecting sales tax for homebuilding materials, boat, airplane, vehicle
• Mutual fund dividend reinvestment statements
• Receipts from out-of-pocket expenses for charitable work
Step 1: All taxpayers can take a state sales tax deduction. Tax filers elect to deduct either local and state income taxes or local and state sales taxes. In states that have income tax, the tax on income is usually larger than the sales tax, so residents get a better deal by taking the income tax deduction.
The IRS publishes tables that reflect how much sales tax can be deducted, depending on state of residence. However, those who have purchased a boat, airplane, vehicle, or homebuilding materials can add the sales tax for the item to the table, as long as the rate does not exceed the general sales tax rate in the state. Use the calculator on the IRS Web site to figure the sales tax deduction to see if this is a better deal for you.
Step 2: Reinvested dividends are not really tax deductions but they are a subtraction that can save consumers money. If dividends from mutual funds are automatically reinvested to purchase additional shares, each reinvestment increases the taxpayer’s tax basis within the fund. This reduces the amount of capital gain taxable when the shares are redeemed. If these reinvested dividends are not included in the basis, double taxation results, so do not make this mistake.
Step 3: Out-of-pocket costs incurred when doing charitable work, such as cost of ingredients used to make meals for a soup kitchen and stamps used for a fundraising campaign for a charity, are tax deductible. If the contribution exceeds $250, written acknowledgement from the charity is required. Also, do not forget the 2010 mileage deduction of 14 cents per mile for any driving for charity purposes.