College and education. College costs are usually not deductible, but there are tax credits for tuition and a limited deduction for interest on student loans. Up to $2,500 in interest can be deducted if your income is under $75,000, or $155,000 for a joint return. A college credit of $2,500 for tuition and related expenses is available if your income is $80,000 or $160,000 for joint filers.
Retirement. One overlooked advantage of becoming self-employed, as many are in this era of non-retirement, is that you can use the SEP (Simple Employment Plan) to put 25 percent of your self-employment income up to $50,000 into a tax-advantaged employment plan. People who have had workplace plans often forget to set up their own. "That's a big mistake," says DuBoff. "It's a great chance to put more away."
Tax deductions on taxes. Amid federal budget cuts in recent years, state taxes are picking up a larger share of the tax burden. Those payments are deductible. In states that do not have income taxes, sales taxes can be deducted. Even if you live in a state with an income tax, you might be able to opt to take the deduction for the sales tax paid. The purchase of a boat or a car in some states might generate sales tax that creates a larger deduction than income tax.
Storm expenses. Hurricanes Sandy and Isaac caused billions of dollars of devastation in the eastern United States. Storm damage can be a deductible item if it amounts to 10 percent of adjusted income. If you reside in an official federal disaster area, you can deduct those costs over a two-year period going back two years.
Beyond the fact that it's the right thing to do, being honest is a good guide. But tax codes are sometimes illogical. For example, there are virtually no tax breaks for people attempting career changes, but many for career advancement. So honesty and logic alone will not be enough. When in doubt, consult.
"If you are entitled to a deduction, I firmly believe you should take it," says DuBoff. "Even if you do not have a record of every expense, a reasonable estimate can work. But it can't be frivolous or way out of line." With the IRS increasingly relying on algorithmic filtering of electronic returns, those outliers quickly draw attention.