Each year, thousands pay too much in taxes because they didn’t think of
deducting job hunting expenses or donations to charity.

Read this list carefully before you file.

1. Pay off debt with a home-equity loan rather than credit cards.
Personal interest is not deductible. Credit-card interest, at rates ranging from 18% to 21%, is usually personal interest (unless it's used for business or investment purposes). You can't deduct it.

If you pay off credit-card debt with a home-equity loan or through a home-equity credit line, the interest on that loan becomes deductible. Home-equity debt is simply any loan secured by a deed of trust on your house. Interest on up to $100,000 of debt is deductible as home-equity interest.

By shifting from credit-card debt to home-equity debt, you not only convert nondeductible interest into interest or expenses you can write off, but you'll probably pay a much lower interest rate.

2. Contribute old clothes, furniture and other items to charity.
Everybody knows that if you contribute cash to a charity, you get a deduction. You can also deduct the wholesale fair market value of non-cash contributions to your church, synagogue, Goodwill or any other qualified charitable organization. You can also deduct your mileage -- at a rate of 14 cents a mile in 2006 -- if you use your car for charitable purposes.

Make sure you get a receipt. The receipt usually will say something like three bags of clothes, without any value given. But don't leave without it. Think of that receipt as green paper with pictures of dead presidents. If you're in the 28% bracket, a $1,000 contribution of old clothes means $280 in your pocket.

3. Bunch your deductions.
Many deductions, such as medical expenses (see discussion below) and miscellaneous deductions, must exceed a “floor” or minimum amount. In the case of miscellaneous deductions, only those expenses that exceed 2% of your adjusted gross income can be deducted. For medical deductions, it's 7.5%

To get the best bang for your deductions, you'll want to concentrate as much deductible spending in one year as you can. This is called “bunching your deductions.” That means if you know you're going to spend a large amount on medical bills this year, look to see if there are other expenses you can deduct now rather than waiting until next year. If your daughter needs orthodontia, pay for it in a year when you know you can get the deduction. Otherwise, you'll be buying those braces with no help from Uncle Sam.

4. Let the IRS subsidize your job search.
Job-hunting expenses are deductible. If you're out of work, or even if you're still employed but looking for a new job, all of your job-hunting expenses are deductible as miscellaneous itemized deductions. Such expenses would include resumes, phone calls, postage, travel costs (you can deduct 44.5 cents per mile in 2006 for the use of your car) and any other expenses related to your attempt to get a new job.

Creativity here can be rewarding. For example, if you take a friend to lunch in an attempt to use him as a reference or referral, you can use the cost of the lunch as a job-hunting expense.

5. Keep up with your investment expenses.
Investment expenses also are allowed as miscellaneous deductions. Such expenses would include investment publications, payment for investment advice, calls to your broker and any other expenses related to the production of investment income.

Rather than buying your investment newspapers and magazines at the newsstand, subscribe to them and use your check as the receipt. If you use your computer for investment purposes (more than just tracking a few stocks), or subscribe to an Internet service for investment purposes, those expenses also become deductible. For a complete listing of miscellaneous deductions, see IRS Publication.

6. Keep receipts on any business supplies or business-related gifts you make.
Pens, paper, a calculator, special tools, a computer and even a briefcase used in business are deductible. If your job requires you to travel, a business suitcase would also be deductible. The key here is to relate the item to your business. For example, as a writer, my computer and my subscription to the Microsoft Network are deductible because I use them in my business.

The key here is that you use the items in the business, not that you necessarily need them. So long as the items are reasonable and appropriate to use in your business, they don't have to be absolutely “needed.”

If there's any doubt, have your employer write a letter saying that such items are required for your position and attach that letter to your tax return. If you're audited, the IRS may ask for such a letter. The best way to win an audit is to avoid it.

7. Tax planning advice is deductible.
As an attorney, my tax-related professional fees are deductible. As an accountant, my tax preparation fees are deductible. As an author, my books and other tax writings are deductible. If you're self-employed, tax-preparation fees can be deducted as business expenses, not only reducing your income tax, but potentially your Social Security and Medicare taxes as well.

8. Remember that not only medical expenses, but any special equipment or treatments you receive, are deductible.
When my son, Josh, was born, he had a hip problem for which his doctor prescribed swimming as an exercise. I could have joined a swim club and deducted the expenses. Instead, I put a pool in my backyard. Let's assume the pool cost $25,000, but it only increased the value of my property by $15,000. The other $10,000 was deductible as a medical expense.

Such capital expenditures are deductible to the extent their cost exceeds the value added to your property. If you have arthritis or any other medical condition that can be helped by a sauna or a whirlpool, those items are deductible. Upkeep for these items also would qualify as deductible medical expenses.

If you use your car for trips to the doctor, keep a record and deduct 18 cents a mile for tax purposes. Now let's get creative. It has been established that the cost of significant dental work is less expensive in Europe than in the United States. Therefore, even with adding the transportation cost, you could pay less for expensive dental work overseas than domestically. On that basis, the courts have ruled that such transportation costs are allowable as medical deductions.

9. Deductible medical services don't have to be performed by your doctor.
If you have a condition like a bad back and your doctor says you need a daily massage or other type of treatment, it can come from someone other than a licensed physician. The service costs are deductible, but I would strongly advise, as proof for the IRS, that you get a written note from your doctor saying you need those services. For a complete listing of deductible medical expenses, see IRS Publication.

10. Self-employed owners can deduct the costs of hiring their children as workers.
Hire your children. You're giving them money anyway. If your business is unincorporated and they're under 18, you won't be liable for any Social Security or Medicare taxes. Moreover, for 2000, you can pay each child as much as $6,400 (each child gets a $4,400 standard deduction plus $2,000 in an IRA), deduct the sum in full, and they pay zero taxes. If you're in the 31% bracket and hire two minor children, you save $3,968 in taxes ($6,400 x 2 x 0.31). This technique has been allowed for children as young as seven years old.

Not only does this technique save income taxes, but it also reduces your liability for Social Security and Medicare taxes on your net income. This could save you an additional $1,958.40 ($6,400 x 2 x 0.153).

Aggressive, yes, but legal too...
Some of the above techniques are aggressive, but all of them are legal -- backed up with court cases, revenue rulings and the like. If they're appropriate for you, use them. Otherwise, you're making a nondeductible contribution to the IRS.

If you have a deduction that you think could lead to an audit, pre-audit yourself. Attach copies of receipts or other documents to prove the deductions. By showing the IRS that you know the rules, you may lessen your chances for an audits.