The answer is through itemized deductions. Now, if you are not big into taxes and how they work, you are probably saying, "through what?" and that's okay. Everything will be explained, even for the least tax-savvy person.
Before we talk about expenses that are tax deductible, let's figure out why we want to collect this information for our accountant. When you file you taxes, you will either owe additional taxes or you will qualify for a tax refund, determined by the government's standards and ratios of how many taxes you paid in comparison to your taxable income.
Your taxable income is any income that can be taxed. When you itemize your deductions, you are lowering the amount that is taxable income. Thus you will either end up paying fewer taxes than you would have, or you will receive a bigger refund from Uncle Sam.
There are many different categories to itemizing tax deductions. You might start with medical and dental bills. Even if you have insurance there are usually other costs to keeping your family health.
You can count any prescriptions that insurance doesn't cover, along with dental work, and even eyeglasses and contact lenses. If there is someone in your household with special needs, you can count any expenses that cost to help them, including that new ramp you had installed for your son's wheelchair.
Now, there is a guideline with counting medical expenses as tax deductions, but if you gather up your bills and receipts you will most likely surpass that number and be able to count all of these medical costs and tax deductible.
Don't ever forget to count your mortgage interest as tax deductible. If you are a newer home owner, you are probably paying more in interest than you are in principal toward your mortgage loan. This amount that you paid in interest can be taken away from your total taxable income.
You should receive a tax document from your mortgage lender that you can give to your accountant to add to your tax deductions. Besides medical bills and mortgage interest, you can also subtract any charitable contributions. When you donate money, be sure to get a receipt for that contribution and count them as a tax deduction as well.
Now, you're starting to see how it works. The more you have paid in mortgage interest, medical expenses, charitable donations, and the bigger tax break you will get. Makes sense doesn't it?
If you have a small business, you will need to keep tract of mileage and all business expenses from new office furniture to the bill for the internet connection. Your accountant can help you find other tax deductions to help you get a better tax return.
But while extending is very easy, good arguments can be made for not extending.
Reason #1: No Delay in Cash Outflow
You can't delay the payment of any tax you owe--only the filing of the actual return. And this rule means that, technically speaking, when you file your extension, you're supposed to pay any tax you owe.
Of course, paying the tax you owe means you need to do (or should do) most of the work required to file anyway.
And all this makes you wonder what extending really gets you. You're supposed to pay the tax on time anyway. And, shoot, you go to much of the preparation work anyway. Why not go to just a bit more work and file on time?
Reason #2: Lost IRA Deductions
Another reason not to extend concerns taking regular and Roth IRA deductions.
Lots of taxpayers like to decide at the very last minute, right before they file their return, whether or not to make an IRA contribution for the year the tax return is being filed for. And that makes sense. By looking at the tax return, you'll often know how much an IRA saves you in tax or whether an IRA provides a nice boost to your refund.
Oftentimes, people need to wait until filing to contribute to an IRA because they may not know if they're eligible until they tally their income.
But extending creates a problem here. IRA contributions need to be made by the original due date of the return, or April 15. As a result, taxpayers who extend their return to October 15 often lose the opportunity to make a last-minute IRA contribution.
Reason #3: Late Input to Current Year Quarterlies
Extending a tax return deadline and then filing late creates another headache for taxpayers (like business owners and investors) who need to prepare estimates of their tax liability and then make quarterly payments.
Here's why: You can use information from the previous year's return to make quarterly payments for the current year. In most cases, for example, you can make quarterly payments equal to one-fourth of the previous year's tax liability. If you owed $20,000 in year 1, making $5,000 a quarter payments in year 2 will typically mean you avoid penalties for underpayment.
If you don't know your year 1 tax liability until close to October 15, however, you can't use that information to make your first three year 2 quarterly payments (due on April 15, June 15, and September 15).
And another point needs to be made about using the previous year's tax return information to help set the quarterly tax payment amount. If for the previous year you're going to get a refund, you can use that refund to reduce your quarterly payment for the current year.
For example, if you will owe $20,000 for the current year, but are entitled to a $5,000 refund for the previous year, you can use that refund to make your first quarter payment. Or at least you can if you file on time.
Note: If your income is high, you may be required to make quarterly payments equal to 110% of the previous year's tax liability in order to avoid underpayment penalties. Consult your tax advisor for more information.
Reason #4: Delayed Refunds
While we're on the subject of refunds, let me a quick observation. In many cases, extenders receive refunds.
That means that by filing late, a taxpayer delays their tax refund. And no way does that make economic sense. Why loan the government your money interest-free?
Reason #5: Greater Chance of Error
One final, big reason exists for not extending a return and then filing late if you use a tax return preparer.
If you force your preparer to do your return very late in the extension season--say in September or, heaven forbid, October--you greatly increase the chances your return will contain a preparation error. And, sadly, you are almost assured of suffering from poorer client service.
At the end of the extension season, your accountant will be feverishly preparing returns for clients who haven't been able to get themselves organized earlier. Automatically, that last-minute rush means the taxpayer supplies in incomplete information, that the return preparer and taxpayer communicate more poorly, and that deductions get missed.
Stephen Nelson has sinced written about articles on various topics from Finances, Setting Up Company and Tax Deductions. is the best-selling author of Quicken for Dummies and the editor of the popular. Stephen Nelson's top article generates over 90500 views. to your Favourites.