March 2, 2008

10 sure-fire tax breaks

Beat the tax man with these valuable deductions, credits and exemptions. What you need to know before you file.

By Jeanne Sahadi, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Are you cross-eyed trying to figure out which tax breaks you can take this year?

You're not alone. And we have Congress to thank for it.

The income tax code - 1.3 million words long, or well more than twice the length of Tolstoy's "War and Peace" - includes thousands of tax breaks for individuals and businesses, according to the Tax Foundation.

And it's not as if these breaks - or their eligibility requirements - are set in stone. To the contrary. Since 1986, lawmakers have made roughly 15,000 changes to the tax code. So there are always new tax breaks, expiring ones and little known or confusing ones to consider each tax season.

Help now: New tax breaks

For a look at some of the important deductions and credits you don't want to miss, we spoke with experts at tax information publisher CCH and the National Association of Tax Professionals.

Mortgage insurance premiums. If you itemize your deductions and pay for mortgage insurance, for the first time you will be allowed to deduct your premiums on your 2007 return in addition to any mortgage interest you pay.

The one catch: your mortgage insurance policy must have gone into effect after Dec. 31, 2006. The deduction is also subject to income limitations.

The premiums, plus the interest you pay on your mortgage, is entered on line 13 of Schedule A.

Mortgage debt forgiveness. If your lender forgave some of your mortgage debt on your principal home last year, you no longer have to pay income tax on that cancelled debt as you would have had to in prior years.

You will have to fill out and attach IRS Form 982 to your return to get this new tax break, which is subject to some limitations on loan size and income.

One-time stimulus rebate. With the exception of high-income taxpayers, most tax filers will receive a one-time tax rebate this year. All you need to do to get yours is file a 2007 federal income tax return and report a minimum of $3,000 in qualifying income.

Beyond that, the IRS will figure out how much of a rebate you should get.

The rebates are worth up to $600 for single filers or up to $1,200 for joint filers. Those with kids under 17 may get an additional rebate of $300 per child.

Here's a breakdown of what you need to know about how the rebates will work and who is eligible.

Last-call: Expiring tax breaks

State and local sales tax. If you itemize your deductions, you may deduct either the state and local income tax you paid in 2007 or the amount you paid in state and local sales tax.

Deducting sales tax is the clear choice for those who live in the seven states without any income tax - Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.

That's also true for those in New Hampshire and Tennessee whose income is based primarily on a paycheck, because those states don't tax wage income. But they do impose tax on interest and dividend income, so if that's your primary source of income, the choice may not be as clear.

Tuition and related expenses. Whether or not you itemize your deductions, you may deduct qualified higher education expenses. You may take the deduction on up to $4,000 in tuition and fees if your adjusted gross income is $65,000 or less ($130,000 for joint filers). If your AGI is higher ($80,000 or less for single filers; $160,000 or less for married couples), you may deduct up to $2,000.

The tuition deduction may not be taken for expenses for which you are claiming an education credit such as the HOPE or Lifetime Learning credits.

You'll need to fill out and attach to your return IRS Form 8917, and enter the tuition deduction on line 34 of the 1040.

Energy-efficient appliances. Making your home more energy efficient can really pay off. You can take a 30% credit on up to $2,000 for the cost of a solar water heater and up to $2,000 for the cost of photovoltaic equipment.

You also can get a 10% credit on up to $500 for insulation and heat-reducing metal roofs, including up to $200 for energy-efficient windows.

Old reliables: Confusing tax breaks

To get the credit you'll need to fill out IRS Form 5695 and enter

Claim your rightful dependents. Just because your child is 18 or older and earning a paycheck doesn't necessarily mean you can't claim her as a dependent.

If you support your child, step-child, sibling or step sibling - and support means you pay for more than 50% of their expenses - you're on the way to being able to claim them as a dependent and get a $3,400 per child exemption against your taxable income.

To seal the deal, they must live in your home for more than half the year and must be under 19, or under 24 if they're full-time students.

For more information, see IRS Publication 501.

Child care. If you work full-time and pay for the care of a dependent - a young child, elderly parent or disabled adult child or spouse - you may be able to get a credit for what you spend above the expenses covered by your tax-deductible flexible-spending plan at work.

Depending