What are these tax deductions?

What records should we keep for itemizing our tax deductions?

• My wife and I might itemize our tax deductions for 2012.  In the past we have always taken the standard deduction.  We will have a baby.  We might buy a home and a car.  What advice do you have for what records we should keep?  What other advice do you have about good deductions to take or other general advice for people who are new to itemized deductions?

• Answer:

  Congratulations on the addition to your family!! If you itemize deductions, you are permitted to deduct the interest that you pay on a mortgage loan used to acquire or improve your primary home, and you are allowed to deduct the real estate taxes that you pay. Sometimes a portion of your closing costs will be allocated to those two categories, so you want to save the closing statement from your home purchase as well as any statements that you get from your mortgage holder(s). Nowadays your mortgage will usually include a portion that is put into escrow to ensure that your taxes and your insurance are paid, and the mortgage holder will send you a Form 1098 early in the New Year that has the mortgage interest and the real estate taxes paid on your behalf. You can deduct contributions to qualified US charities, of both cash and property. You always have to have a record that shows the name of the organization to which you donate and the date and amount of the contribution. For cash contributions, this can be a cancelled check, a receipt from the organization, or a pay stub and pledge card if you do this through employer payroll deductions. For each single cash contribution of $250 or more, you must also have a written acknowledgement of your contribution from the organization that specifies the date and amount of the contribution and also the amount of any goods and services that you received (if any) due to your contribution (you can't include those in your deduction). For property contributions you generally need to keep written records of the items that you donate, and depending on the value of the items you donate you will usually need an acknowledgement from the organization and perhaps an appraisal of big-ticket items. I recommend using something like ItsDeductible from TurboTax or DeductionPro from H&R Block to track property donations - my experience is that most people undervalue their property donations because they have no idea what the fair market value of those used clothes really is. You can deduct state and local income taxes that you pay in 2012. This includes the amount that you have withheld on your paycheck(s) - although if you get a refund you will have to add that back into your income in 2013. These will appear on your W-2, and tax software imports these into the proper place. As of right now, there is no option for deducting sales taxes in lieu of income taxes for 2012, although that could change - if it does, there will likely be a safe harbor exemption based on your income, so you don't need to keep receipts for this. You can also deduct certain other state and local taxes. You are allowed to deduct personal property taxes that you pay in 2012 on motor vehicles, boats, etc, to the extent that those taxes are assessed on the value of the item (these are called ad valorem taxes) - you want to keep the bill that you get from the state or local government and the cancelled check or other record that shows you paid it, and when. You can't. In a few states (notably New Jersey and Pennsylvania), the state also deducts taxes for unemployment insurance and disability insurance - these will show up in Box 14 of your W-2 as "SUI" or "SDI" respectively and can be deducted. For 2012, you can deduct out-of-pocket medical expenses to the extent that they exceed 7.5% of your adjusted gross income (AGI). You cannot deduct insurance premiums that are paid with pre-tax dollars (which most company programs are). You would need to keep records of these expenses. Prescription drugs and glasses are included. (In 2013 that percentage will increase to 10% as it stands now.) Those are the ones that you will likely run across. I think if you use common sense in all of these cases you will be well-protected from IRS audit.