| Hybrid Cars
Hybrid vehicles do not qualify for the electric vehicle credit. That is because they are not powered primarily by electric motors. So what kind of tax break is available? This type of car may be eligible for a clean-fuel deduction. Generally, the deduction is limited to the cost of the electric components of the automobile. The taxpayer must be the original owner of the car and the car must be intended for his or her own personal or business use (not for resale). The IRS has certified the 2005 Ford Escape to be eligible for the one-time-clean-burning fuel deduction. This allows taxpayers who purchase the sport utility vehicle (SUV) to claim a tax deduction of $2,000 on Form 1040. Current federal tax law allows taxpayers to claim a deduction for vehicles that use clean-burning fuel. Under the Working Families Tax Relief Act of 2004, the clean-burning fuel deduction is up to $2,000 for certified vehicles first used in 2004 and 2005. But not for long. The deduction will be limited to a mere $500 in 2006, and then it will disappear altogether. Previously certified vehicles included the Toyata Prius, cetified for model years 2001-2005; the Honda Insight, certified for model years 2000-2004; and the Honda Civic Hybrid for model years 2003-2004. Sport Utility Vehicle (SUV)
SUVs that have a gross vehicle weight of more than 6,000 pounds may not be subject to passenger automobile depreciation limitations. Therefore, it may be possible to write off some or most of the cost of the SUV in the year you purchase it. However, the SUV must be used primarily for business reasons to qualify for any depreciation deduction. Your daily commute to your office does not qualify as a business use of the SUV. Please check with a tax professional if you are not sure. Credit for IRA Contributions
If your adjusted gross income is $50,000 or less and you are married and filing a joint return, $37,500 or less if you or a head of household, or $25,000 or less for any other filing status, you may be eligible for a credit for making IRA contributions. The credit varies from 10 percent to 50 percent of your contributions. Up to $2,000 of contributions is eligible for the credit. You can claim the credit in addition to any deduction for which you are eligible. You must be 18 or older, cannot be claimed as a dependent, and cannot be a full-time student. Medical Expenses Related to Obesity
If you pay for a weight-loss program because you are obese, you can deduct the cost as a medical expense. You cannot deduct the cost of low-calorie foods that are a substitute for the normal food you eat, but you can deduct the cost of food if it doesn't satisfy your normal nutritional needs, it alleviates or treats an illness, and the need for the food is verified by a physician. Standard Mileage Rate
The standard mileage rate for business use is 37.5 cents per mile for 2004 and 40.5 cents for 2005. But if you bought a vehicle in 2004 that is eligible for the special 30-percent or 50-percent depreciation allowance, the actual expense method may be more advantageous. When making this choice, it's smart to estimate the amount of your vehicle deductions for the current year and future years and make the choice based on your expenses for the entire time you expect to keep the vehicle. Contact an H&R Block office for help in making this decision. Your Castle Can Have a Business Wing
If you use your home office regularly and exclusively as your principal place of business, including everything from simple administration to management, you can qualify to deduct home office expenses. Even a plumber who uses her home office to order supplies and make appointments, even though she performs a majority of the business outside her home office, can take the deduction. One catch - you cannot use the space at all for any personal reason and still qualify. If your child uses your computer for video games, you can no longer claim the home-office deduction. The office does not need to be a separate room; it can be part of a dining room, basement, or even a bedroom, as long as that part of the house is used for no other purpose. If you work out of your house, you can deduct a portion of home expenses, such as rent, mortgage interest, insurance, security systems, utilities, casualty losses and depreciation, as well as maintenance and repairs that are normally personal expenses. Bringing work home for your convenience doesn't qualify you for the deduction, but bringing work home because your employer does not provide you a place to perform your duties does. Don't forget to deduct the smaller items often overlooked: the cost of business cards and paper fliers, copy shop expenses for copies or computer time, annual fees and interest expenses on credit cards used exclusively for business, and the cost of postage, overnight deliveries, and courier services. You can also claim 37.5 cents per mile (for 2004) for business use of your personal vehicle. Drive Away with a Tax Break
Instead of going through the hassle of selling your car, you can donate it and guarantee a cash advantage -- a tax deduction. When you donate a car to a charitable organization you can deduct the fair market value of the car. The IRS defines fair market value as the price at which the car would change hands between a willing buyer and seller if neither were forced to buy or sell. To ensure that the IRS doesn't question your deduction, you can clip a page of classified ads showing the prices of similar vehicles or include a photo illustrating the car's condition. For deductions of $500 or more, attach Form 8283, Noncash Charitable Contributions, to your tax return. The form allows you to describe the condition of the car and how you determined the value. For deductions of more than $5,000, you must attach a copy of an appraisal, made by a qualified professional, to your tax return. In addition, you must fill out the appraisal portion of Form 8283 and attach it to the return. To take a charitable deduction, you must file Form 1040 and itemize deductions on Schedule A. Be aware that the IRS is on the lookout for auto donation abuses. Any sign of excessive valuation of your car could bring a possible audit. If you take a deduction for more than the value of the car you donated, you could be hit with a penalty of up to 40 percent of the unpaid tax. Note: Keep in mind that if you donate a car, boat or plane to a charity, the rules will change in 2005. Starting Jan. 1, you will no longer be able to deduct the fair-market value of the vehicle if the charity sells it. You can only deduct the amount received from the sale of the car. Similarly, you won't be able to deduct non-cash donations totaling more than $500 unless the charity provides documentation indicating whether or not the property will be sold or used by the organization. Soldiers Get Special Protection from the IRS
Active-duty military personnel in combat zones receive certain tax breaks and privileges that help keep their minds on the job at hand. As a member of the military, you are eligible for an interest-free extension to pay your income taxes because service in Kosovo and other locations may have seriously impaired your ability to pay or file a return. The extension lasts for the initial period of service plus six months and covers a soldier's spouse as well, regardless of whether they file joint or separate returns. The extension applies only to federal income taxes. Individuals serving in a combat zone as support for the U.S. Armed Forces, such as Red Cross workers, accredited correspondents and civilian personnel acting under the direction of the U.S. Armed Forces are also entitled to the extension. All active-duty pay earned by U.S. armed forces personnel performing duties in a combat zone is not subject to federal income tax. Soldiers are still obligated to pay social security and Medicare taxes. Active duty pay is not taxed in the state in which military personnel are currently stationed, only in their official home state of record. Most states exempt all or part of active duty pay. Calling home is also encouraged, because telephone calls placed to the United States from a combat zone by a member of the U.S. Armed Forces are exempt from the federal excise tax on toll telephone service. If you already paid the excise tax, you can file IRS Form 8849 to obtain a refund. Combat zone military personnel, still under the combat extension, are eligible to make qualified contributions to an IRA for the 2004 tax year after April 15, 2005. U.S. Armed Forces personnel who are entitled to a refund but who do not file until they return home from combat duty will receive interest on the refund amount from the IRS. However, the tax return must be filed within the six-month extension window to be eligible for the interest payment. Stormy Weather Brings Tax Relief
If you've suffered the personal anguish of losing your home or property in a natural disaster, the IRS has made it a little easier to survive the financial anguish. To claim your loss, you must itemize deductions on Schedule A and attach Form 4684 to your return. The loss amount is based on the lower of two numbers: Either the price paid for the property plus any improvements (called the basis) before the disaster, or the property's decline in market value, which can be determined by repair costs. The deductible amount is reduced by insurance and other nontaxable reimbursements. If you don't use the property for business, the deductible amount is reduced by $100 and then by 10 percent of your adjusted gross income. Reimbursements for losses are not taxable, unless you come out ahead by receiving more for the property than its original cost plus the cost of improvements. Even if the reimbursement is more than the basis, you don't have to pay tax currently if you replace lost, damaged or destroyed items with similar property within two years after the event. To avoid paying taxes on any gain resulting from insurance proceeds, you should replace property with similar property. (IRS publication 584 provides a list of common household items and serves as a guideline to report what was lost.) However, because insurance proceeds for the home and its contents are considered a common pool of funds, you can use more of the money to replace the house than the contents or vice versa. Replacement property does not have to match item for item. Food, medical supplies and other forms of assistance that you receive are not taxable, nor do these items reduce the loss unless they are replacements for lost or destroyed items. You have up to four years to replace your principal residence or pay the gain. You can choose to deduct a loss on your current year return or amend the preceding year's return, whichever helps your current financial or tax situation the most. As a taxpayer in a disaster areas, your filing deadline may be postponed up to 90 days. Any interest that normally would apply for late payments is waived in this situation. Deductions Don't Require Depreciation
If you buy equipment for your home-based business that you don't want to depreciate, you can claim the section 179 expense deduction. Use Form 4562. You may not be able to take the full deduction, based on your income level. See this Web site for more information on expenses and depreciation, or consult your local H&R Block office. Taxes Complicate Health Care Issues
If your employer has a cafeteria or flexible spending plan that allows you to pay medical expenses with pre-tax dollars, it generally is beneficial for you to use the plan rather than pay expenses with after-tax dollars. Under a flexible benefits plan, you set aside a portion of your salary to pay medical expenses. The amount you set aside is not subject to income tax or employment taxes. But if you don't use the entire amount you set aside, you forfeit the unused amount. Amounts you pay with pre-tax dollars are not deductible. Contact an H&R Block office for help in determining how to best take advantage of such a plan. Pounding the Pavement Has Its Perks
Uncle Sam always encourages meaningful employment. And to prove it, you can deduct the cost of resumes, including production, printing and mailing costs; contact calls; and even travel to your interviews for jobs in your field. Don't forget, though, you cannot write off anything for which you are reimbursed. Don't Get Comfortable on Your Office Furniture
If you want to write off your new home office desk chair, don't even think about sitting in it after hours. You can deduct the cost of your furniture only if it is used 100 percent for business. Ordinarily you would depreciate that cost over several years, but the section 179 expense deduction allows you to deduct the entire cost in the year of purchase if you qualify. Divorce and Taxes
Divorce changes many things. If you're considering getting a divorce, don't forget to consider your following year's taxes. Usually, legal fees involved in a divorce aren't a deductible item unless the fee was for tax advice. For divorce-related tax questions, speak to a professional preparer before the divorce decree becomes final to ensure you understand the tax consequences of your agreement. Paying Others' Taxes: Commendable but Not Deductible
If you are a generous sort and decide to pay other people's taxes, you gain no tax benefit. (If you are not legally liable, then you cannot deduct them.) Likewise, the person you paid them for cannot deduct them because she didn't pay them. If you pay more than $11,000 for 2004, you are required to file a gift tax return. Be Careful Who's Minding the Kids
If you run your own day care center, you cannot claim a child-care credit for your own child. You can only claim day care expenses when you pay someone else. Being Jobless Doesn't Mean You're Tax Free
Although you receive unemployment benefits to make up for some of the wages you aren't getting, these benefits are taxable. To help ease the burden at tax time, you can file Form W-4V to specify the amount of tax to be withheld from your benefits. Make That Uniform Work for You
Uniforms and union dues are part of your employee business expenses. Enter them on Line 20, Schedule A. Of course, you can only claim those expenses if they add up (along with other things such as tax preparation fees, some investment expenses, etc.) to more than two percent of your adjusted gross income. Home Ownership: A Big Asset in Tax Reduction
Owning a home is one of the best things you can do to reduce your taxes. Congress would like to see most Americans own homes, and that is why you can deduct many home-related expenses, including yearly mortgage interest, points, and real estate taxes. Tax Breaks for Higher Education? Do Your Homework
You could be eligible for tax breaks if you return to school or have dependents attending school. You may qualify for the Hope Credit, the Lifetime Learning Credit, a deduction on your tax return if you itemize, or an exclusion for Series EE or I bond interest. The maximum Hope Credit tax break is $1,500 per student. The maximum Lifetime Learning Credit is $2,000 per return (up to 20 percent of the first $10,000 of expenses). You may also contribute up to $2,000 per year to a Coverdell Savings Account for your children, but that is a savings plan, not a tax credit or deduction. Tax breaks can make going back to school more affordable, so check with your tax professional and choose the option that is best for you. Making a Claim on Dependents with Income
You can still claim your children if they are under age 24 and you have provided them with more than half of their support, even if they have income exceeding one exemption amount. To claim such children ages 19 through 23 as dependents, they must be full-time students for some part of at least five months during the year. Reaping the Benefits of a Roth IRA
Considering a Roth IRA? Consider these benefits: Earnings are nontaxable when withdrawn, provided you meet the holding period requirements (generally five years). Another advantage is, unlike traditional IRAs, the IRS does not require you to take a distribution from a Roth IRA when you reach age 70 1/2. Contributions can be withdrawn at any time without tax consequences. Roth IRAs are not without some restrictions, however. As with traditional IRAs, distributions of earnings are taxable and subject to a 10-percent penalty if taken out prematurely. Another drawback is that Roth IRA contributions are never deductible. So, for taxpayers who qualify to deduct contributions to traditional IRAs, the choice can be difficult. Home Sweet Home Tax Deductions
If you sell a home that you used as your principal residence for at least two of the five years immediately preceding the date of sale, you won't pay tax any gain unless it exceeds $250,000 ($500,000 if married filing jointly). You normally can claim this exclusion no more than once in any two-year period. If you buy a new house, you'll be able to deduct your interest payments and, possibly, any points you paid to get the loan. IRA Contributions not Always a Tax Shelter
Contributing to an IRA can reduce your income if you are eligible to deduct your contributions. If you or your spouse (if married) participates in an employer plan, your ability to deduct the contributions may be limited. Excess Charity Can Follow You into Next Year
The maximum deductible contribution allowed is 50 percent of your adjusted gross income (AGI). If you gave more than 50 percent, the excess may be carried forward for up to five years. The 50-percent rule applies to most contributions, but it may be lower for contributions to certain organizations or for certain contributions of property. Office Equipment Write-Off May Not Compute
Even if you use your personal computer for employment purposes, you may not be able to write off the full amount. To claim a deduction, it must be required for your job. The amount of the deduction depends on the amount of time you use the computer for your job. This is a fairly complicated topic with many conditions. Contact an H&R Block tax professional for assistance. Timing of Home Purchase will Affect Taxes
Buying your home early in the year generally increases the likelihood that you'll be able to deduct your mortgage interest and property taxes in the first year. Mortgage interest and points are deductible as itemized deductions on Schedule A. If you buy your home late in the year, your itemized deductions may be less than your standard deduction simply because you've only made a few months' payments. In that case, you're better off with the standard deduction even though you cannot deduct your interest or taxes. If this is the case and you paid points, you may choose to write the points off over the life of the mortgage. Charitable Giving Helps for Non-Homeowners
Think you need to own a home to itemize and take advantage of your charitable contributions? Many people who contribute regularly to a charity such as a church may be able to itemize anyway. When charitable contributions are combined with items such as state and local income taxes and personal property taxes, the sum may exceed the standard deduction. Contact a tax advisor for complete information on what is deductible and how much you need to itemize. A Gift to Your Children
You can give your children as much as you'd like per year in stocks or cash. But if the value of the gifts exceeds $11,000 (for 2004), you have to file a gift tax return. Get a Head Start on Next Year's Taxes
If itemizing deductions reduces your taxes, you'll save even more by starting a paper trail early in the year. By saving your receipts for charitable contributions, job-related education expenses, deductible taxes, work-related expenses and medical expenses, you'll be certain to take all appropriate deductions. Additionally, determine how much withholding you require, especially if you think you may owe more for 2005 than you did for 2004. If you know you'll be short, request that an additional amount be withheld from your paycheck - it may prevent you from incurring a penalty next year. Buy Low, Sell High, and Tell Your Tax Guy
Stock transactions create capital gains and losses, which are reported on Schedule D. Any net losses exceeding $3,000 need to be carried over to subsequent years. Be aware of wash sales. If you sell a stock at a loss and buy it again within 30 days before or after the sale, you cannot deduct the loss, but the loss increases the basis of the replacement stock. You can deduct your investment expenses, not your losses, on Schedule A as an itemized deduction. Online Auctions: the Fine Line Between Hobby and Business
If you are participating in online auctions for the thrill of the chase, you keep your amateur status. If you sell items as well as buy and are able to itemize, you can deduct your auction expenses related to the sales transactions. For your tax records, be sure to track the price you paid or how much it cost you to make what you sold, how much it cost you to sell it, the selling price and the date sold, and the shipping costs. Be aware, though, if your online trading becomes more than just a hobby, your profits may be subject to self-employment tax, as well as income tax. Make Your Education Less Taxing
Headed back to the classroom to upgrade your job skills? Your education expenses will probably provide you a tax break. If you're taking classes to improve your skills in your present occupation, your expenses are deductible as an itemized deduction. This deduction, however, is limited to the amount of your qualified education expenses that - when grouped with certain other expenses - exceeds two percent of your adjusted gross income. Keep in mind that the same expenses are probably eligible for the tuition and fees deduction, which you can claim even if you don't itemize deductions, and/or the lifetime learning credit. You can only use one tax break for each set of education expenses, so you'll want to determine which will save you more money. Document Your Contributions
Many charitable organizations make extra efforts to collect money and goods during the last quarter of the year. Be sure to keep records of the money you contribute to UNICEF or other similar charities at Halloween and the canned goods and other non-perishables you put in collection bins for organizations that help the needy. Your last-minute contributions can add up to a nice deduction if you itemize. Remember, if you contribute $250 or more at one time to a charity, the organization receiving the donation must provide you with written documentation of the donation. A cancelled check is not sufficient proof. Spend Wisely to Itemize
If you don't have enough deductions to itemize, consider bunching -- by delaying or accelerating -- your eligible expenses so that you can itemize every other year. Some expenses for which you may be able to control the payment time include medical-related costs, real estate and personal property taxes, charitable contributions, and work-related expenses. Taming the Alternative Minimum Tax
If you're claiming large deductions for taxes or employment expenses, or if you exercised incentive stock options, you may be subject to the alternative minimum tax. To plan for the alternative minimum tax, you'll need to take at least two tax years into account. For example, if you'll be subject to this tax for 2004, but not for 2005, you may want to postpone paying expenses such as real estate tax and a fourth-quarter state estimated tax payment until 2005. See your tax professional for help in determining both whether you are subject to the alternative minimum tax and what you can do to minimize its effects. Charitable Deductions Begin at Home
Make sure your generosity during the coming year pays off as much as possible by rounding up all of your write-offs. The big contributions which translate to the big deductions are hard to overlook - what you give your church or synagogue or alma mater. But little expenses from your good-deed-doing can also mount up. Whether it's out-of-pocket contributions to a bell-ringer or what you pay for supplies while you're doing charitable work, if the money is going to help a qualified charitable organization, you get a deduction. If you drive your own car while doing volunteer work, you can deduct 14 cents a mile. If your charitable work takes you out of town overnight as the official delegate to a church meeting, for example, you can deduct the cost of transportation and the cost of your meals and lodging. Know the Ins and Outs of Investment Interest
Despite a widespread belief that only mortgage interest is deductible, the law still allows investors to deduct interest on loans used to make investments that produce taxable income. Such interest is deductible to the extent of your investment income. When totaling up your investment income for purposes of this limit, you generally can't count capital gains that get special treatment under the law. Congress doesn't want to let you deduct investment interest in a higher bracket if your gains are being taxed at only 5, 10 or 15 percent. You have the option of including your capital gains in investment income but then can not take advantage of the lower capital gains rates for those gains. Contact your tax professional for help in determining which option may be best for you. Claiming Interest on Your Ho-Ho-Home
You can claim the interest portion of a December mortgage payment mailed during the final days of the year, even if it doesn't show up on the lender's year-end statement. As long as your check is in the mail by December 31, you'll get a 2004 deduction - even if the check isn't cashed until 2005. Student Loan Interest
This tax-saver allows you to deduct up to $2,500 of student loan interest, even if you don't itemize deductions. The right to this write-off disappears as modified adjusted gross income moves from $50,000 to $65,000 on an individual return and from $100,000 to $130,000 on a joint return. The deduction is for interest on any loan (not just federal student loans) used exclusively to pay qualified higher education expenses (including room and board) for yourself, your spouse, or an individual who was your dependent at the time the loan was taken out. The student must have been taking at least half the normal full-time workload for the course of study the student was pursuing. Don't Dismiss Jury Fee Deductions
If you serve on a jury, your employer may continue your full salary but require you to turn over the jury fees. The law demands that you report the jury fees as income, though, so claim a deduction in the adjustments section of your return to protect yourself from being taxed on money that only passed through your hands. Steer Automobile Deductions Your Way
Depending on where you live, you may be able to write off part of what you pay for auto license tags as a personal property tax. Any part of the fee based on the value of your car is deductible. This helps residents in about one-third of the states. If you're not sure, call your local department of motor vehicles. Smart Gifts Make Great Write-Offs
There's a special break if you donate property such as stock or mutual fund shares to charity. If you owned the asset for more than a year, you get to write off its value on the day that you made the gift, not what you originally paid for it. You don't have to pay tax on the appreciation while you owned the stock, either. Take advantage of this break now if you donated appreciated property last year and keep it in mind in the future. Whenever you make substantial contributions, consider using appreciated property instead of cash. What if you really want to keep the stock in your portfolio? Donate the shares you own and use the cash you would have given to buy shares on the open market. The advantage is that you'll owe tax only on profit that accrues after you repurchase the shares. If the stock or mutual fund shares you plan to donate have decreased in value, sell the shares and donate the cash. That way, you can deduct your loss and claim a charitable deduction as well. Don't Overlook This Tax Deduction
If you itemize deductions, you probably already know to deduct the personal property tax you pay on your car, if your state has such a tax. But do you remember to deduct the personal property tax you may pay on your boat or other personal property? Personal property taxes are deductible if they are based only on the value of the property; and charged on an annual basis, even if collected more or less often than once a year. Cosmetic Surgery - Can I Deduct?
As we lie on the beach in our bathing suits, the thought of cosmetic surgery may enter our minds. If a tummy tuck or some liposuction seems in order, the bad news is that cosmetic medical procedures costs aren't generally deductible. They are deductible, however, if required to correct a deformity caused by an accident or disfiguring disease. Secret Deduction in Volunteer Work
Summertime is often a time for increased volunteer activities. Do you drive for Meals on Wheels? Take church youth on field trips? Drive to the location of a Habitat for Humanity house you're helping to construct? Keep track of all your volunteer mileage - 14 cents for every mile is deductible as a charitable contribution. To make your record keeping easier, stop by participating H&R Block offices for a free mileage record book. The Difference is Deductible
Suppose you buy a Christmas tree from a non-profit organization such as a church. If you pay $80 for a 5-foot pine, and 5-foot pines are going for $50 all over town, the $30 difference is deductible. It's considered your donation to the church. The same goes for a Hanukkah menorah or Kwanzaa candles. Anytime your purchase from a not-for-profit organization includes a donation, ask the selling organization for a statement that says how much of your purchase price is a charitable contribution. If you are using the breast cancer awareness postage stamp to mail your holiday greetings then you know the stamps cost more than the usual 37 cents. The Postal Service is directing proceeds from the sale of the stamp to medical health and research organizations. So for every card you send, that's a donation of the difference between what you actually paid for the stamp and 37 cents to charity. Keep track of your total charitable donation and you may deduct it. | 
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