Your diligence in keeping track of deductible expenses will pay off at tax time.

Medical expenses.  The medical expense deduction is limited to the amount by which annual medical expenses exceed 7.5% of AGI (adjusted gross income).  Included in this category are unreimbursed amounts paid for health insurance, hospital and nursing care, doctors' and dentists' visits, prescription medications, eyeglasses, hearing aids, and long-term care insurance premiums and services (within the IRS limits).  If you make a medically necessary home improvement, your cost is deductible to the extent it exceeds any increase in the value of your property resulting from the improvement.

TIP Medicare Part A and Part B premiums voluntarily paid by Social Security recipients are considered deductible medical expenses.  The mandatory employment or self-employment taxes paid for basic Medicare coverage are not deductible as medical expenses.

Recent IRS rulings also allow deductions for admission and transportation to medical conferences related to a dependent's chronic disease, smoking cessation programs, and drugs prescribed to alleviate the effects of nicotine withdrawal.  If you travel to obtain medical treatment, you may be able to deduct the cost of your transportation, as well as food and lodging while you are en route.

Taxes.  Real estate taxes, state and local personal property and income taxes, and foreign income taxes generally tax deductible.  The deduction for real estate taxes includes amounts paid on raw land and second homes, not just your principal residence.

TIP Avoid unnecessary prepayments of state income taxes in years you may be subject to alternative minimum tax.  Such taxes aren't deductible in computing AMT.

Interest.  In addition to the deductions for mortgage and home equity interest you can deduct investment interest to the extent of your net investment income.  Interest that exceeds this limitation may be carried over to future years.  Interest paid on a margin loan from a stockbroker is considered investment interest.

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