1. Maintaining poor tax records. Don't rely on your memory to keep track of deductions. During the year, accumulate tax receipts and notes concerning deductions in one place.
2. Withholding too much in taxes. When you receive a refund, you've given the government an interest-free loan for the year. Consider reducing your withholding and investing the extra money.
3. Not contributing to your company's retirement plan. Not only will the plan help you save for retirement, but it may also help reduce your current-year tax bill. For instance, for 2010 you may contribute a maximum of $16,500 to a 401(k) plan (unchanged from 2009). If you're in the 35 percent tax bracket, contributing $16,500 reduces your current-year tax bill by $5,775.
4. Failing to bunch deductions. It only makes sense to itemize deductions if your total deductions exceed the standard deduction amount, which for 2010 is $11,400 for married taxpayers filing jointly and $5,700 for single taxpayers (both unchanged from 2009). In addition, some deductions must exceed certain thresholds. For example, medical expenses are only deductible to the extent that they exceed 7.5 percent of adjusted gross income (AGI) and miscellaneous expenses are only deductible to the extent that they exceed 2 percent of AGI.
Many expenditures can be bunched into one year or another to take advantage of these limits. For instance, if your total itemized deductions are slightly below the limit, you might consider prepaying property taxes or state estimated tax payments.
5. Overlooking charitable contributions. In addition to cash and property donations, you may deduct mileage, parking fees, postage, and long-distance phone calls made while performing charitable work.
Keep in mind, however, that since 2007, deductions have not been allowed for cash contributions unless the donor has written proof as to the amount, date, and name of the charity. Donations must now be substantiated by a cancelled check, bank record, credit or debit card statement, or by a written statement provided by the charity.
6. Not considering filing separate returns. In some situations, it may be more beneficial for a married couple to file separately. Once you file jointly, your return can't be amended to file separately, so calculate your tax both ways before filing.
7. Forgetting deductions carried over from prior years. Don't forget about items you carried forward because you exceeded annual limits, such as capital and/or passive losses, charitable contributions, and alternative minimum tax credit.
