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When you dump out your shoe box full of receipts on the kitchen table to do you taxes, sorting out what is deductible and what is not can be the biggest puzzle.
“The whole thing is steeped in mysticism,” says Mark Steber, chief tax officer at Jackson Hewitt.
That is a plausible reason why 68% of filers forgo this torturous process and file for the standard deduction, according to IRS statistics for 2013, the latest year available. For 2015 returns, the standard deduction is $6,300 for individuals and $12,600 for married couples.
If you think you have more than that in allowable expenses, it is time to get very familiar with Schedule A. The list of itemized deductions features several with high variability, including medical expenses, charitable deductions and unreimbursed employee expenses. This is where the deduction confusion sets in.
The stakes can be high: The amount you claim in deductions gets subtracted from your adjusted gross income and lowers your tax burden. If you exceed certain income caps, starting at $154,950, some of these deductions are limited.
Here are some of the things you can and cannot do with your deductions:
* Medical expenses
A small fraction of the slice of taxpayers who itemize deductions qualify to take medical expenses because the thresholds are so high. Since 2013, you can only deduct the portion that is greater than 10% of your adjusted gross income.
“Most people don’t get this,” says Steber.
You cannot deduct items or services that your employer or insurance reimbursed you for – that would be double-dipping. You also get no credit for over-the-counter items or health club dues.
In this age of crowdfunding, charitable donations can be a little confounding. You may have given to a lot of causes by clicking a few buttons. But the recipient probably does not qualify as a non-profit for tax purposes.
“Whoever you donate to has to be a recognized non-profit, have a charitable purpose and be recognized by the IRS,” says Lisa Greene-Lewis, a CPA and tax expert with TurboTax, a division of Inuit Inc.
Your favorite political candidate or cause also does not count, notes Greene-Lewis.
A key identifier: Does the organization have a tax identification number?
Any tax software you use, or your human tax preparer, should walk you through the process with a series of prompts to find out which of your causes qualifies. TurboTax also has an app, ItsDeductible, to help keep track throughout the year.
Another way to check is to use the IRS’s Exempt Organization Select Check.
This is particularly useful if you are planning to donate clothing or other household items. You will need a slip from the organization with an estimate of how much the donation is worth.
Metal donation bins in parking lots will be a hard sell with the IRS for two reasons: Many are not actually from recognized charitable organizations, and you will not have any proof of your donation.
“The law doesn’t say what the documentation should be – just that you have to be able prove it,” says Steber.
Another distinction to note: If you buy something from a charitable organization – such as Girl Scout Cookies or an item at an auction – you cannot deduct the cost of the item as if it were a donation.
* Employment Expenses
When you hear crazy stories about deductions, they usually fall into this miscellaneous category – such as the professional body builder who deducted body oil or the exotic dancer who deducted the cost of her augmented breasts.
The IRS says a deductible employment expense is one that is “ordinary and necessary”; it gives such examples as dues to professional societies and job search expenses, as well as home office expenses.
You can, however, only deduct employment expenses in excess of 2% of adjusted gross income.
The big no-no, as with medical expenses, is not claiming anything you already got back from your employer.
To make sure you capture every last penny back that you are due, you might want to keep a journal throughout the year, Steber suggests. “Monitor any life events you have – not just getting married or having a child. Did you start taking care of a dependent family member? Did a spouse take classes? Those life events drive a lot more tax opportunity,” he says.