Top 10 tax deductions for 2007 income tax

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Noncash contributions

Charity, as I hope everyone remembers, begins with a tax deduction. If you didn’t have the cash to contribute in 2007, I hope you charged it. And, likewise, if you don’t have the cash when it comes time to contribute in 2008, go ahead and charge it. The deduction is allowed in the year of the charge, not when you actually pay the bill.

Get a receipt from the charity to which you made a donation, and, if you’re still worried about documentation, get the credit card company to send you their record of the transaction.

Now, let’s say you emptied your closets and gave everything to Goodwill or a similar charity. The value of your donated items — clothes, furniture, whatever — is deductible. Get a written receipt. With noncash charitable contributions, the rule is simple: No receipt means no deduction if you get audited. Clothes and household goods must be in good or better condition to get the deduction.

If you’ve already dumped your old clothes in a Salvation Army box and walked away without a receipt, take the deduction anyway. You’ve legitimately made the contribution. You just may not be able to prove it in an audit. Starting with 2007 returns, the law requires a receipt or some sort of written confirmation for all charitable donations. Feel lucky? Play the audit lottery. You’re still an honest person.

If you can, reconstruct as much as you can the list of items you donated and then figure out their market value. The easiest way is to go to a thrift store and check prices there.

And then, of course, when you make the donation, get that receipt.

New points on refinancing
With interest rates so low over the past few years — even in 2007 and 2008 — lots of homes have been refinanced, sometimes more than once.

Any points you pay to refinance your home can be deducted on a monthly basis over the life of the new loan. So, if you refinanced your mortgage on June 1, 2007, for a 20-year term, seven out of 240 months will have passed after Dec. 31. If you paid $2,400 in points, you can write off $70 ($10 a month for seven months) for 2007. You can write off $120 for 2007 and each year thereafter until the points have been deducted in full. The amount may not be huge, but every little bit helps.

Old points on refinancing
This is one deduction lots of people miss. All unamortized points on an old refinancing are deducted in the year of a new refinancing.

Talk back: Should I report a tax cheat?

So, let’s say you refinanced on June 1, 2006, and paid $2,400 in points. You refinanced again on June 1, 2007. You can deduct all the remaining points on the 2006 loan. That’s $2,280 plus the $50 you could deduct for January through May 2007. Likewise, if you refinance the 2007 loan in 2008 (if interest rates stay low), you will be able to write off the remaining balance on your 2008 return.

Health insurance premiums
Any health insurance premiums you pay, including some long-term-care premiums based on your age, are potentially deductible. You have to add these, however, to your medical expense pot. Medical expenses have to exceed 7.5% of your adjusted gross income (AGI) before they give you any tax benefit.

But if you’re self-employed and not covered by any other employer-paid plan, you can deduct 100% your health insurance premiums “above the line.” Above the line means the expense is included in adjusted gross income and doesn’t get lumped in with itemized deductions. That means that you not only don’t have to exceed the 7.5% floor, you don’t even have to itemize!

Educator expenses
If you’re a qualified educator, you can get an above-the-line deduction of as much as $250 for materials you bought in 2007 and may buy in 2008. That includes books, supplies and even computer equipment. You qualify if you’re a kindergarten through grade 12 teacher, aide, instructor or principal.

Congress extended the law through 2007, and I’m betting they’ll renew the break in 2008.

Video on MSN Money
What’s the AMT?

The alternative minimum tax was originally intended to ensure high-earning Americans paid their fair share of income taxes. But it hasn’t been substantially adjusted over the years and catches more and more middle-class people.
Student higher education expenses
For 2007, if your adjusted gross income isn’t more than $65,000 ($130,000 on a joint return), you can get an above-the-line deduction of as much as $4,000 for any higher-education expenses you paid. Now, the law expires after 2007. So, again, this is one that bears watching, although I see the break getting renewed.

See if you qualify for the Hope and Lifetime Learning credits. The Hope credit is worth as much as $1,650 per student subject to income limits for 2007 and $1,800 for 2008. The Lifetime Learning credit is worth as much as $2,000 per return. Compare the credit with the deduction, and go with the one which gives you the biggest benefit. And, if you don’t qualify for either credit, you may be able to deduct up to $4,000 in education expenses in 2007 and, one hopes, in 2008. Again, Congress has to renew the break. (I’m sorry if this sounds like a bad record.)

Clean fuel credit
Credits are good because they are a dollar-for-dollar reduction in tax. And if you bought a new hybrid gas-electric auto or truck in 2007, you can get a conservation tax credit of between $250 and $1,000 and an additional fuel economy credit of between $400 and $2,400, depending on the make and the fuel economy. A hybrid car combines an electric motor with a gas fueled internal combustion engine.

But act quickly. The credit starts to phase out when the auto manufacturer sells its 60,000th hybrid vehicle. That’s the total per manufacturer, not 60,000 per model. Once the cap is reached, the phaseout starts at the beginning of the second subsequent calendar quarter.

Tell back: What’s the most ridiculous tax you pay?

For the next two quarters, you can claim only half the credit. In the six months after that, 25% of the full credit. So, if Honda’s cap was reached, say, in August 2006, buyers of Honda’s hybrids would get 100% of the credit through Dec. 31, 50% for those purchased in January 2007 through June 2007, and 25% for any bought in the remainder of the year. After that, zero.

You get the deduction in the year you start using the car, and you must be the original owner. Take it on your Form 1040 by writing in “clean fuel.”

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