You can spend a lot of time determining which tax deductions will benefit you most throughout the year – and usually, that’s time well spent.
For example, if you’re in the 25 percent tax bracket, every dollar you find in deductions may save you close to 25 cents in taxes.
Let’s take a look at how five of the most popular deductions can slash your tax bill.
Home mortgage interest.
A large portion of your house payment probably goes to home mortgage interest expense, especially in the early years of your loan.
Fortunately, you can generally deduct that interest expense if you itemize deductions.
Mortgage interest can be deducted on your primary or secondary home. The secondary home can be a house, condo, motor home or even a boat if it has kitchen, bathroom and sleeping facilities.
Your bank or other lender should send you a Form 1098, Mortgage Interest Statement, in January to report the amount of interest you paid for the year.
State and local income taxes.
Depending on where you live or work, you may pay substantial state and local income taxes. In fact, some people pay more state and local tax than federal income tax.
The good news? You can deduct state and local income taxes with your itemized deductions on Form 1040, Schedule A, for the year in which you paid them
Typically, state and local taxes are deducted from your pay. You can find the amount of tax you paid on your Form W-2, Wage and Tax Statement.
You should also check your state tax return filed during the year to see if you paid additional tax when you filed.
If you paid state and local sales tax, that amount is also deductible. However, you can deduct only the state income tax or sales tax amounts.
You cannot deduct both in the same tax year.
If you make contributions to qualified charitable organizations, such as religious groups, hospitals or disaster relief programs, you can deduct the dollar amount with your other itemized deductions.
The IRS has more stringent rules about receipts and reporting than they did many years ago, however, so make sure you get a receipt for your donation before you file your return.
If you’re looking to make a large contribution, you may want to consider giving property that has gone up in value since you purchased it.
Doing this can be beneficial in two ways: you can deduct the current value of the property and you may not have to pay capital gains on the amount the property went up in value.
Plus, don’t forget noncash contributions. Be sure to get a receipt when you drop off clothing and household goods at charitable organizations so you can take a deduction on their value.
Retirement plan contributions.
Deductible retirement plan contributions top the list of ways you can reduce your taxes after the end of the tax year.
Depending on your plan, you may have until the official tax filing deadline (April 18 in 2016) or your extended filing date to fund your retirement plan and take a deduction on your contribution.
Retirement plan deductions are classified as “above the line” deductions. That means you can take the deduction even if you don’t itemize deductions.
As a bonus, they reduce your adjusted gross income, which may help you qualify for other tax benefits.
Real estate taxes.
Real estate property taxes vary widely from state to state. In some places, property taxes on a home may be only a few hundred dollars a year.
In other places, the property taxes on a home may cost more than mortgage interest expenses. Property taxes are deductible in the year you pay them or the year your bank pays them on your behalf from your escrow account.
If you pay property taxes on other property, such as vacant land or a second home, you can still deduct the tax.
If you pay property taxes on a rental property, be sure to deduct the tax with your rental expenses on Schedule E, Supplemental Income and Loss.