Most Overlooked Tax Deductions
Don’t overpay taxes by overlooking tax deductions. See the most common errors taxpayers make on their tax returns, so you don’t make the same mistakes.
The most recent numbers show that more than 45 million of us itemized deductions on our 1040s—claiming $1.2 trillion dollars’ worth of deductions. That’s right: $1,200,000,000,000! That same year, taxpayers who claimed the standard deduction accounted for $747 billion. Some of those who took the easy way out probably shortchanged themselves. (If you turned age 65 in 2013, remember that you deserve a bigger standard deduction than younger folks.)
Here are some of the most overlooked tax deductions. Claim them if you deserve them, and keep more money in your pocket.
This write-off makes sense primarily for those who live in states that do not impose an income tax. You must choose between deducting state and local income taxes, or state and local sales taxes. For most citizens of income-tax states, the income tax deduction usually is a better deal. IRS has tables for residents of states with sales taxes showing how much they can deduct. But the tables aren’t the last word.
If you purchased a vehicle, boat or airplane, you get to add the state sales tax you paid to the amount shown in IRS tables for your state, to the extent the sales tax rate you paid doesn’t exceed the state’s general sales tax rate. The same goes for home building materials you purchased. These items are easy to overlook. The IRS even has a calculator on its Web site to help you figure out the deduction, which varies by your state and income level.
This isn’t really a deduction, but it is a subtraction that can save you a lot of money. And it’s one that many taxpayers miss. If, like most investors, you have mutual fund dividends automatically invested in extra shares, remember that each reinvestment increases your “tax basis” in the fund. That, in turn, reduces the amount of taxable capital gain (or increases the tax-saving loss) when you sell your shares.
It’s hard to overlook the big charitable gifts you made during the year by check or payroll deduction. But the little things add up, too, and you can write off out-of-pocket costs you incur while doing good deeds. Ingredients for casseroles you regularly prepare for a nonprofit organization’s soup kitchen, for example, or the cost of stamps you buy for your school’s fundraiser count as a charitable contribution. If you drove your car for charity in 2013, remember to deduct 14 cents per mile.
In the past, if parents paid back a student loan incurred by their children, no one got a tax break. To get a deduction, the law said that you had to be both liable for the debt and actually pay it yourself. But now there’s an exception. If Mom and Dad pay back the loan, the IRS treats it as though they gave the money to their child, who then paid the debt. So a child who’s not claimed as a dependent can qualify to deduct up to $2,500 of student loan interest paid by Mom and Dad.
Here’s an interesting dichotomy: Job-hunting expenses incurred while looking for your first job are not deductible, but moving expenses to get to that first job are. And you get this write-off even if you don’t itemize. If you moved more than 50 miles, you can deduct 23 cents per mile of the cost of getting yourself and your household goods to the new area, (plus parking fees and tolls) for driving your own vehicle.
A credit is so much better than a deduction—it reduces your tax bill dollar for dollar. So missing one is even more painful than missing a deduction that simply reduces the amount of income that’s subject to tax.
But it’s easy to overlook the child care credit if you pay your child care bills through a reimbursement account at work. Until a few years ago, the child care credit applied to no more than $4,800 of qualifying expenses. The law allows you to run up to $5,000 of such expenses through a tax-favored reimbursement account at work.
Now, however, up to $6,000 can qualify for the credit, but the old $5,000 limit still applies to reimbursement accounts. So if you run the maximum $5,000 through a plan at work but spend more for work-related child care, you can claim the credit on up to an extra $1,000. That would cut your tax bill by at least $200.
Millions of lower-income people miss out on this every year. However, 25% of taxpayers who are eligible for the EITC fail to claim it, according to the IRS. Some people miss out on the credit because the rules can be complicated. Others simply aren’t aware that they qualify.
The EITC is a refundable tax credit – not a deduction – ranging from $487 to $6,044. The credit is designed to supplement wages for low-to-moderate income workers. But the credit doesn’t just apply to lower income people. Tens of millions of individuals and families previously classified as “middle class” – including many white-collar workers – are now considered “low income” because they lost a job, took a pay cut, or worked fewer hours last year.
The exact refund you receive depends on your income, marital status and family size. To get a refund from the EITC you must file for a tax refund, even if you don’t owe any taxes. Moreover, if you were eligible to claim the credit in the past but didn’t, you can file any time during the year to claim an EITC refund for up to three previous tax years.
Did you owe taxes when you filed your 2012 state tax return in 2013? Then remember to include that amount with your state tax itemized deduction on your 2013 return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments.
When you buy a house, you get to deduct points paid to obtain your mortgage all at one time. When you refinance a mortgage, however, you have to deduct the points over the life of the loan. That means you can deduct 1/30th of the points a year if it’s a 30-year mortgage—that’s $33 a year for each $1,000 of points you paid. Doesn’t seem like much, but why throw it away?
Also, in the year you pay off the loan—because you sell the house or refinance again—you get to deduct all the points not yet deducted, unless you refinance with the same lender.
Some employers continue to pay employees’ full salary while they are doing their civic duty, but ask that they turn over their jury fees to the company coffers. The only problem is that the IRS demands that you report those fees as taxable income. If you give the money to your employer you have a right to deduct the amount so you aren’t taxed on money that simply passes through your hands.