Get Ready: Part Three

Last week Tax Team discussed two ways to decrease the tax you pay.  The first way is using deductions, which lower your taxable income, and therefore the amount of your tax.  The second way is using tax credits, which reduce your actual tax.  Both of these require effort on your part to prove through receipts and other documentation that you are legally able to use these items.

On the Schedule A, mortgage interest is a very common deduction.  Over the next several days, watch your mail or on-line account for information labeled “1098.”  The 1098 document shows the amount of mortgage interest you paid over the year and other information your tax preparer or software will need to document the deduction. You can also deduct taxes you paid to the state (from your W2), state sales tax (the safe harbor method is easiest; if you bought a big-ticket item like a car or boat over the year, use the receipt that shows the sales tax) Even a portion of your car tabs can be deducted, so have your tab receipt available.  Real estate taxes are also deductible but do not use the amount on your 1098.  Instead, use the amount from your property tax statement indicating the tax without any assessments or interest. 

Charitable donations are also very common.  Again, you will need documentation, either receipts or cancelled checks.  For those non-cash donations to charity keep an itemized list of everything you donated with its fair market value.  Goodwill has an excellent guide on their website.  The prices are very liberal.  Some people even take a picture of their items as part of their documentation!   Good news:  even if you do not itemize, you can use charitable donations as a subtraction on your Minnesota return. 

Medical deductions are more complicated. Beginning this tax season, you can only deduct what is beyond the first 10% of your adjusted gross income; so many taxpayers cannot deduct medical expenses at all.  Tax Team’s advice:  Be grateful!!  Good health is better than tax deductions!!  If you are not so fortunate, remember again to have your receipts. Tax Team suggests asking your service providers for a printout of co-pays over the course of the year.   Remember that your out of pocket payments for health and dental insurance can be deducted too. 

Only tax nerds would get excited over tax credits, and Tax Team is ecstatic about the higher education federal tax credits and the MN K-12 Education Subtraction/Credit.  These are wonderful credits and have helped many people. To claim a federal tax credit, you will need information from the 1098-T, a document from your school indicating amount of tuition and scholarship money.  Keep track of your book receipts too.  The MN K-12 Subtraction/Credit gives parents the opportunity to reduce their taxes using the receipts from school supplies, educational software and computer supplies, and private education tuition, music and dance lessons.  All of these credits are highly audited by the State and the IRS; so keep your documentation current and well organized. 

Questions?  Comments? Contact Tax Team at john.lawless.tax@gmail.com Thanks!