The dos and don'ts of income-tax deductions

Find the Deduction is a game with constantly shifting rules. Each year Congress changes something in the tax law, the Internal Revenue Service issues opinions, and tax courts make their rulings. If you like a challenge, learning this year's deduction options is like a game of chess. If not, it's a tedious round of hide-and-seek. But either way, it's worth knowing the rules.

Charitable donations. Do keep a receipt for every donation--cash or not cash--worth $250 or more made after Aug. 17, 2006. And here's a quirk: Multiple smaller donations to the same charity don't require them. So several $249 donations to the same charity would not require receipts. The rules change again for tax-year 2007; you will need receipts for all cash donations, regardless of value.

Don't itemize donations of furniture, clothing, and other goods that weren't in at least good condition when you gave them. A new IRS rule aims to weed out junk donations, though at the time of this writing, the agency hadn't yet defined "good" condition. Until then, use your judgment.

Medical expenses. Do deduct premiums for the Medicare Part D prescription drug insurance program, as well as other health-insurance premiums you pay yourself. The premiums for long-term-care insurance are deductible on a sliding scale according to your age.

Do read the IRS list of deductible medical expenses (see Publication 502 under More Forms and Publications at The following costs, for example, are deductible to the extent they address a health issue: wigs recommended by a doctor for mental health or to cover hair loss caused by disease; special mattresses and bed boards; back supports; elastic hosiery; childbirth classes, and remedial reading instruction for dyslexic children.

Don't expect much. You can only deduct unreimbursed medical expenses that exceed 7.5 percent of your adjusted gross income. If you are subject to the Alternative Minimum Tax, the floor is higher: 10 percent. (If you're self-employed, your health-insurance premiums may be 100 percent deductible. See Publication 502 for eligibility criteria.)

Retirement accounts. Do contribute to an IRA if you're eligible. Taxpayers under age 50 can put in up to $4,000; those 50 and over can sock away $5,000. For 2006, if you're covered by a retirement plan at work, your deduction for contributions to a traditional IRA will be phased out if your AGI is more than $75,000 but less than $85,000 for joint filers. You have until the filing deadline to make a contribution.

Do fund a SEP IRA if you made money from self-employment last year. You are eligible even if you held another job and contributed to a 401(k) there.

Extended deductions. Do check the IRS Web site for Publication 553, which outlines popular deductions that were reinstated by Congress late last year.

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