|CNN's Gerri Willis reports on how to maximize your tax deductions.|
NEW YORK (CNN/Money) -
If you want to keep from owing Uncle Sam money this April 15th, you'll want to take full advantage of the deductions due you.
They are out there in abundance. According to the IRS's most recent numbers, those filers who itemized back in 2002 deducted an average of $19,673 from their taxes.
But you'll need to go further than just the good old mortgage interest deduction to find your savings. Dig up your deductions with today's five tips.
1. Shop 'til you drop your taxes.
For the first time in nearly a decade, you can either deduct your state income tax or your state sales tax. If you had some rather extreme shopping habits this year, i.e. you bought a yacht, this could work out nicely for you.
Deducting your income taxes will generally be the better break, but tax experts say if you made a major purchase in 2004 such as a car or boat, you might want to compare which is the larger deduction. This is also a nice bonus for taxpayers living in low- or no-income tax states. There is currently no state income tax in: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
To figure out what your state sales tax total was, take a look at your receipts from big-ticket items or refer to tables on theIRS Web site.
2. Make your gifts count.
Last year's spring-cleaning can really pay off. If you donated items worth more than $500 to Goodwill, the Salvation Army and others, you must include a written description or the charity's receipt of the items.
And don't forget to include the receipts or cancelled checks for donations you made to the local fire department, United Way, or other charities. Remember, those have to be donations, and not payment for a function or a box of cookies.
You also get a bonus for your generosity to the Tsunami relief efforts: Money donations made up until January 31st will count toward your 2004 taxes (the usual deadline is December 31st). So speed that tax benefit up a full year. Unfortunately, a deduction on the clothing, food, and tools you donated will have to wait until your 2005 tax filing.
3. Work it from home.
So you work in sweatpants and pink slippers. There is nothing to be ashamed of come tax time. You can get a sizeable deduction for your home office.
Kay Bell, the tax editor at Bankrate.com, says of the home office deduction, "This is one a lot of people shy away from. There is a fear that if you do something different, the IRS will take a longer look at your return."
The truth is this is not an oddball deduction. It's one that many people should be taking advantage of: 44 million people, or nearly a third of our country's workforce regularly works from home, according to In-Stat/MDR.
Bell says the rule is you have to have a space in your home that is used exclusively and regularly for your work. (The old laptop at the kitchen table doesn't count.)
You'll need to calculate what percentage of your home is used for business. That percentage will help you deduct a portion of your mortgage interest, real estate taxes, and even utilities used by your home office. Check out Form 8829 on the IRS Web site.
4. Take your medicine.
For your serious out-of-pocket pain, the IRS has some relief. If you've spent 7.5 percent of your adjusted gross income on medical expenses, you can deduct them.
That chunk of change might make for some heavy medical bills, but you can do a few things to get there. For one thing, don't forget all the expenses. If you drive an hour to a certain specialist, count the mileage. The IRS will give you $0.14 cents a mile. For 1,000 miles driven in a year, you can deduct $140. If you have your receipts for gas to drive you to those appointments: even better.
Don't forget the deduction for the eyeglasses you paid for without insurance. And include the cost of the quit-smoking program you took too. But don't think about getting deductions on your over-the-counter medications: your tax benefits there lie in your employer's flexible spending account programs.
If your family has high medical bills, but you're running short of the 7.5 percent threshold, you might consider filing separately, letting the spouse with the lower income claim the whole family's medical expenses. But keep in mind that filing separately can cut you out of other tax breaks, so weigh both options.
5. Don't get too creative.
You've heard the stories -- people who deduct their kids' allowance, exotic dancers who deduct breast implants. You could win in the long run, but the cost of fighting the IRS is high.
What's more, they have three years to come back and say they are going to audit you. If they suspect fraud, they can audit you as far back in time as they like.
Gerri Willis is a personal finance editor for CNN Business News and the host for Open House. E-mail comments to email@example.com.