Get the Most Out of Your Tax Deductions

Feb. 9, 2010— -- Dreaded, despised, depressing. They're all words we use to describe April 15, tax day.

But here's another "d" word you should add to the mix: Deductions.

This year there are some new ways to save a lot of money on your taxes and "GMA" financial contributor Mellody Hobson has a round-up of some of the most important.

Web-Exclusive Tip 1: Check Your Math

When completing your tax return, Hobson said to make sure your math is right. The best way to overcome this issue is to e-file.

According to the IRS, 95 million people e-filed last year. E-filing with a tax preparation software package allows you to ensure that proper computation takes place.

Of paper returns, the IRS said 20 percent have errors, whereas only 1 percent of electronically filed returns have them.

But remember, Hobson said if you enter the wrong numbers in the first place, e-filing will not catch this error, so make sure you double check your work. The IRS has resources to help you e-file for free on its Web site at www.irs.gov.

Web Exclusive Tip 2: Get Your Paperwork in Order

According to Hobson, another common issue is not having all of your paperwork in order.

If the IRS is unable to verify the information you provided then it makes their own adjustments to how much you owe. You could also be subject to an audit.

Make sure you organize all of your paperwork -- this includes W-2s, other forms that show taxes withheld during the year, and receipts for itemized deductions and charitable donations, Hobson said.

Two important things to remember about charitable donations, if the donation is over $250 then you must have a letter from the charity showing you made the donation of that amount. Additionally, if you receive a gift in thanks for your donation --for example a tote bag or a mug --then you can only deduct the amount you donated over the value of the item. For example, if you donated $150, and you received a $50 gift in return, then you can only deduct $100.

Also when you are submitting your tax return make sure you attach your W-2, other forms that show taxes withheld during the year, and any other applicable schedules, Hobson said.

Web Exclusive Tip 3: Report All of Your Income

Just because you didn't receive a 1099 form for your additional work does not mean you do not have to report that income, Hobson said.

If you get caught not reporting this additional income, the penalty is quite high. Not only will you have to pay taxes on that amount, but the interest will be about 6 percent per year and you could incur penalties of up to 20 percent.

On Air Tip 1: Itemize for Deductions

According to financial analyst company Kiplinger, 46 million people itemize their deductions and they claim about $1 trillion worth of deductions. The 85 million taxpayers who take the standard deduction claim half as much, Hobson said.

This is why for many people, it pays to go to a tax preparer so you can take every possible deduction. The tax preparer's fee is deductible.

The IRS estimates that from gathering information to completing the tax form, the average taxpayer takes more than 21 hours to do their return, Hobson said.

On Air Tip 2: Unemployment and Deductions

In addition, if you've been looking for a job in the same field, you may be eligible for some job hunting deductions - including employment agency fees, resume prep, traveling for interviews, even postage used for sending out resume.

You can claim these expenses as long as your miscellaneous itemized tax deductions total more than 2 percent of your adjusted gross income.

Job hunting expenses are not deductible when you are looking for your first job, Hobson said, but moving expenses could be. If you landed your first job in 2009 and had to move 50 miles to take it, you can deduct your moving expenses, taking a deduction for moving your household to a mileage reimbursement of 24 cents a mile for driving your car to your new home, plus parking costs and tolls paid on your way there.

On Air Tip 3: Expanded First Time Home Buyer Credit

Part of the stimulus package effort to boost home sales includes an expanded first time home buyer credit, Hobson said.

The most recent IRS estimates show that about 1.4 million buyers have taken advantage of the first-time home buyer tax credit and now long-time home owners can get a piece of the action -- as much as $6,500 in credits.

On Air Tip 4: Easily Avoidable Mistakes

Here are some common, easily avoidable mistakes:

Double check your social security number. The wrong number stops your return in its tracks and delays you refund.

Sign and date your return. If you use a tax preparer, make sure the preparer does the same. If your preparer won't sign your return, it should send a red flag to you that the preparer is not willing to stand behind his or her work, Hobson said.

Double check everything. The IRS is serious about enforcement and it will be looking at your return more closely, Hobson said. The IRS hired 5,000 to 7,000 new agents in 2009 and plans to hire another 5,000 agents in 2010.

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