Top Ten Tax Deductions
Housing / Parsonage allowance
A housing allowance paid to you as part of your salary is not income to the extent you use it, in the year received, to provide a home or to pay utilities for a home with which you are provided. The amount of the housing allowance that you can exclude from your income cannot be more than the reasonable compensation for your services as a minister. The church or organization that employs you must officially designate the payment as a housing allowance before the payment is made. A definite amount must be designated; the amount of the housing allowance cannot be determined at a later date.
Ministers who live in a church-provided parsonage or manse can exclude from their income for federal income tax reporting purposes the fair rental value of a parsonage or manse provided to them. However, the fair rental value (including the cost of utilities that are furnished) and the appurtenance allowance (including an amount for payment of utilities) paid to you are subject to Social Security tax.
Mortgage interest and property taxes
You can deduct the mortgage interest (not the principal) that you pay on a loan secured by your primary residence or a second home. To claim the deduction, you must be obligated to pay the debt and you must actually make the payments.
You can also deduct any taxes you pay on real estate you own. If you have a mortgage on the property, the annual mortgage statement (Form 1098) you receive from the bank should include both the amount you paid in real estate taxes for the year and the interest and points you paid for the year (your mortgage interest deduction).
You can deduct any cash or noncash contributions you make to a qualified nonprofit organization. While you are supposed to save receipts for any contribution, deductions for noncash contributions under $250 are rarely questioned.
For noncash contributions over $250, you must have a receipt or acknowledgement from the nonprofit organization. For noncash contributions over $500, you have to file an extra form with your tax return, Form 8283, Noncash Charitable Contributions.
Medical expenses and health savings accounts
You can deduct the amount of your medical and dental expenses that exceeds 7.5% of your adjusted gross income. Eligible expenses include both health insurance premiums and out-of-pocket expenses not covered by insurance for both you and your dependents. Unless your medical expenses are substantial, however, your medical expenses will probably fit within the 7.5% limitation, meaning you won’t be able to deduct anything.
If you have a qualified Health Savings Account (HSA), you can deduct your contributions to the account, and you don’t have to pay tax on any interest you earn from the account. To establish an HSA account, you must have a high-deductible health plan that qualifies under the HSA rules. You can use money in your HSA account to pay almost any kind of health-related expense.
Child and dependent care
If you have to pay someone to care for your child (under 13) or a dependent needing care so that you can work or look for work, you may be able to claim a tax credit for those expenses. The credit is a percentage of your eligible work-related child or dependent care expenses, ranging from 20% to 35%, depending on your income.
There is a dollar limit on the amount of expenses for which you can claim the credit. The limit is $3,000 of the expenses paid in a year for one person, or $6,000 for two or more. You must reduce these dollar limits by the amount of any dependent care benefits provided by your employer that you exclude from your income.
State and local taxes
Under the American Jobs Creation Act of 2004, taxpayers have been given a choice when it comes to deducting state and local taxes. For the tax year 2006, you can choose to deduct either your state and local income taxes or your state and local general sales and use taxes, but not both. You can decide whether it’s more beneficial to deduct your income tax or your sales tax.
This is good news for taxpayers who live in states with no (or a low) state income tax like Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
IRA and 403(b) contributions
If your employer offers a 403(b), it pays to maximize your contributions. For the 2006 tax year, the maximum contribution increased to $15,000.
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For IRAs, you can contribute $4,000 in 2006, and deduct that amount from your income. If you are 50 or older, you can contribute an extra $1,000.
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Student loan interest
You can deduct up to $2,500 in student loan interest payment per year, for the lifetime of the loan. However, there are income limits–you can’t take this deduction if you make more than $65,000 as a single person or $135,000 as a married couple.
You can currently deduct $4,000 for tuition-related expenses every year, or you may qualify for the Hope and Lifetime Learning credits, which are also for education.
In addition, you can now contribute up to $2,000 to a Coverdell education savings account (formerly called an education IRA) each year. (The amount isn’t deductible, but distributions from the account for payment of tuition are tax-free.)
You can deduct education and training costs for your job if your employer doesn’t reimburse you for them (and if the education is for your current job, not to get a better job later). Job-hunting expenses, including mileage, are also deductible. If you’re a teacher, don’t forget to include teaching-related expenses for a small tax break.