Congressmen and pundits who have lately singled it out as a target in national debt talks know that it's a politically perilous road.
(Read More: End the Mortgage Interest Deduction? Expect a Fight)
For now, the deduction's there, so make the most of it. In addition to payments for mortgage interest and taxes, premiums on mortgage insurance and interest charges on late payments are deductible, advises Smith.
A little-known break for home buyers, Smith says, is that even if your seller paid the "points" for your home mortgage as part of the closing, that prepaid interest is still deductible for the buyer.
Also, at a time when many homeowners are refinancing thanks to low interest rates, keep in mind that you must amortize the points over the life of the loan, explains Mary Canning, dean of the Schools of Taxation and Accounting at Golden Gate University.
That is, if in your second year of owning a home you refinance and pay one point on a $500,000, 30-year loan, you're limited to amortizing the $5,000 of points over 30 years.
(Read More: What the IRS Doesn't Want You to Know About Audits)
The amortization begins in the month the refinancing is done and points are paid. So if the refi occurs in September the calculation is this: Four months in the year from September, divided by 360 months of the loan, multiplied by 5,000 in points (4/360 x 5000)?which equals $56 in eligible deductible points.
If in year 3 you refinance again in January, you've retired that earlier loan and can deduct the unamortized points of $4944 ($5,000 minus $56).
Charity: Good Will Gives Back
Most people don't forget to deduct their charitable contributions, says Canning. "But many miss the mileage," she says. Driving you've done as volunteer?whether for Meals on Wheels or picking up an elderly neighbor for church?can be deducted at 14 cents a mile. (You cannot deduct the cost of driving yourself and your family to church?that's not an act of charity.)
It's best if you've kept a mileage log. But in a pinch, if you have a record showing you made the trips and Google Maps to calculate the distance, it's still a legitimate deduction.
In the same vein, a scout leader can deduct the cost of her uniform and a volunteer can deduct the miles for visiting a shut-in.
(Read More: What to Do With your Tax Refund)
More good deeds that reap tax benefits: Deduct expenses?mileage and more?for a volunteer excursion for Habitat for Humanity or the like, given you didn't do any vacationing along the way. And housing a foreign exchange student is worth up to $50 a day.
A churchgoer can deduct the amount of his tithe?but only if he's got a record of it. And for any amount over $250, that means a receipt stipulating that the giver received no benefit for his contribution. Even under the threshold, use checks so you have a record. Unsubstantiated claims of cash in the collection plate don't fly.
Red flags: Claims of large gifts of appreciated property get the attention of the IRS. Also, if you donate a box of clothing to the Salvation Army, the IRS assumes everything included is valued for a thrift shop. So you may have paid $1,000 for a dress, but that doesn't mean you can claim a $500 value when you donate it. The only way around this is a professional appraisal.
Work: On-the-Job Deductions
Many Americans have been on the job hunt, and the government allows deductions for that pursuit, but only if those expenses?which include resume preparation services, printing and mailing costs, travel expenses, etc.?exceed 2 percent of gross income. And if it's your first job hunt, you don't qualify.
If you landed the job but had to relocate, you can deduct unreimbursed moving expenses. Keep in mind that the new job must be 50 miles farther from your previous residence than your old office.
(Read More: Last-Minute Savings on Your 2012 Taxes)
For the self-employed, there's a lot to track. A home office can make for a handsome deduction, but auditors have been known to demand proof of the space and its exclusive business use. Keep records and don't get cute.
However, Canning says deductions for a legitimate home office can go beyond the obvious; don't forget bills for water, garbage, housekeeping and even gardening, with all amounts determined by the percentage of the residence taken by the workspace.
Also, consider business-related expenses of your automobile, depreciating office equipment, continuing education, and entertainment and restaurant tabs.
For cellphones and computers, your best bet to avoid the auditor's red pen is by having ones you use exclusively for work. Mixed-use devices muddy the waters.
Source: http://www.cnbc.com/id/100569169
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