Most Overlooked Tax Deductions
The Most Overlooked Tax Deductions
There's more than $1 trillion dollars in tax deductions according to Intuit. Claiming the ones you qualify for
means more money in your pocket. Below, you will find the most overlooked.
State sales taxes
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 to help you figure out the deduction, which varies by your state and income level.
This is not a tax deduction, but rather a subtraction that many taxpayers miss; and one that can save you lots of money. If you have mutual fund dividends automatically invested in extra shares, 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.
Forgetting to include the reinvested dividends in your cost basis—which you subtract from the proceeds of sale to determine your gain—means overpaying your taxes.
Out-of-pocket charitable contributions
You may not forget the big charitable gifts you made 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, remember to deduct 14 cents per mile.
Student loan interest paid by Mom and Dad
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.
Moving expense to take first job
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.
Child and Dependent Care Tax Credit
A tax credit is much better than a tax 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 and dependent 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.
Earned Income Tax Credit (EITC)
Millions of lower-income people miss out on this every year. However, 25% of taxpayers who are eligible for the Earned Income Tax Credit 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 $503 to $6,242 for 2015. 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 a tax return, 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.
State tax you paid last spring
Did you owe taxes when you filed your 2014 state tax return in 2015? Then remember to include that amount with your state tax itemized deduction on your 2015 return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments.
Refinancing mortgage points
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.
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.
Jury pay paid to employer
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.
Military Reservists' Travel Expenses
Members of the National Guard or military reserve may write off the cost of travel to drills or meetings. To qualify, you must travel more than 100 miles from home and be away from home overnight. If you qualify, you can deduct the cost of lodging and half the cost of your meals, plus an allowance for driving your own car to get to and from drills.
For 2015 travel, the rate is 57.5 cents a mile, plus what you paid for parking fees and tolls. You may claim this deduction even if you use the standard deduction rather than itemizing.
Deduction of Medicare Premiums for the Self-Employed
Folks who continue to run their own businesses after qualifying for Medicare can deduct the premiums they pay for Medicare Part B and Medicare Part D, plus the cost of supplemental Medicare (medigap) policies or the cost of a Medicare Advantage plan.
This deduction is available whether or not you itemize and is not subject to the 7.5% of AGI test that applies to itemized medical expenses for those age 65 and older. One caveat: You can't claim this deduction if you are eligible to be covered under an employer-subsidized health plan offered by either your employer (if you have a job as well as your business) or your spouse's employer (if he or she has a job that offers family medical coverage).
Estate Tax on Income in Respect of a Decedent
This sounds complicated, but it can save you a lot of money if you inherited an IRA from someone whose estate was big enough to be subject to the federal estate tax. Basically, you get an income-tax deduction for the amount of estate tax paid on the IRA assets you received. Let's say you inherited a $100,000 IRA, and the fact that the money was included in your benefactor's estate added $40,000 to the estate-tax bill. You get to deduct that $40,000 on your tax returns as you withdraw the money from the IRA. If you withdraw $50,000 in one year, for example, you get to claim a $20,000 itemized deduction on Schedule A. That would save you $5,600 in the 28% bracket.
American Opportunity Credit
Unlike the Hope Credit that this one replaced, the American Opportunity Credit is good for all four years of college, not just the first two. Don't shortchange yourself by missing this critical difference. This tax credit is based on 100% of the first $2,000 spent on qualifying college expenses and 25% of the next $2,000 ... for a maximum annual credit per student of $2,500. The full credit is available to individuals whose modified adjusted gross income is $80,000 or less ($160,000 or less for married couples filing a joint return). The credit is phased out for taxpayers with incomes above those levels.
If the credit exceeds your tax liability, it can trigger a refund. (Most credits are “nonrefundable,” meaning they can reduce your tax to $0, but not get you a check from the IRS.) This credit was scheduled to revert to the less-valuable Hope Credit limits in 2018, but in 2015, Congress made the better-for-you American Opportunity Credit permanent.
A College Credit for Those Long Out of College
College credits aren’t just for youngsters, nor are they limited to just the first four years of college. The Lifetime Learning credit can be claimed for any number of years and can be used to offset the cost of higher education for yourself or your spouse . . . not just for your children. The credit is worth up to $2,000 a year, based on 20% of up to $10,000 you spend for post-high-school courses that lead to new or improved job skills. Classes you take even in retirement at a vocational school or community college can count. If you brushed up on skills in 2015, this credit can help pay the bills. The right to claim this tax-saver phases out as income rises from $55,000 to $65,000 on an individual return and from $110,000 to $130,000 for couples filing jointly.
Those Blasted Baggage Fees
Airlines seem to revel in driving travelers batty with extra fees for baggage, online booking and for changing travel plans. Such fees add up to billions of dollars each year. If you get burned, maybe Uncle Sam will help ease the pain. If you're self-employed and travelling on business, be sure to add those costs to your deductible travel expenses.
Credits for Energy-Saving Home Improvements
There’s no longer a tax credit to encourage homeowners to save energy by, for example, installing storm windows and insulation. But the law still offers a powerful incentive for those who install qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines. Your credit can be 30% of the total cost (including labor) of such systems installed through 2016.
Bonus Depreciation ... And Beefed-Up Expensing
Business owners—including those who run businesses out of their homes—have to stay on their toes to capture tax breaks for buying new equipment. The rules seem to be constantly shifting as Congress writes incentives into the law and then allows them to expire or to be cut back to save money. Take “bonus depreciation” as an example. Back in 2011, rather than write off the cost of new equipment over many years, a business could use 100% bonus depreciation to deduct the full cost in the year the equipment was put into service. For 2013, the bonus depreciation rate was 50%. The break expired at the end of 2013 and stayed expired until the end of 2014 . . . when Congress reinstated it retroactively to cover 2014 purchases. (That reprieve ended on December 31, when the provision expired again . . . but near the end of 2015, Congress revived the break. The 50% bonus applies for property purchased in 2016 and 2017, too; the bonus drops to 40% in 2018 and 30% in 2019.
Perhaps even more valuable, though, is another break: upercharged "expensing," which basically lets you write
off the full cost of qualifying assets in the year you put them into service. This break, too, has a habit of coming
and going. But as part of the 2015 tax law, Congress made the expansion of expensing permanent. For 2015 future years, businesses can expense up to $500,000 worth of assets. The half-million-dollar cap phases out dollar for dollar for firms that put more than $2 million worth of assets into service in a single year.
Break on the Sale of Demutualized Stock
In 2015, the IRS found another court that agrees with its tough stand on the issue of demutualized stock. That's stock that a life insurance policyholder receives when the insurer switches from being a mutual company owned by policyholders to a stock company owned by shareholders. The IRS's longstanding position is that such stock has no tax basis, so that when the shares are sold, the taxpayer owes tax on .100% of the proceeds. In 2009 and again in 2011, federal courts sided with taxpayers who challenged the IRS position. Late in 2015, though, a divided federal appellate court ruled in favor of the IRS. Sooner or later, the Supreme Court may have to settle things.
In the meantime, if you sold stock in 2015 that you received in a demutualization, you have a couple of choices. Claim a basis and, if the IRS rejects your position, file an appeal. Or use a zero basis, pay the tax on the full proceeds of the sale and then file a "protective refund claim" to maintain your right to a refund if the matter is eventually settled in your favor.
Social Security Taxes You Pay
This doesn’t work for employees. You can’t deduct the 7.65% of pay that’s siphoned off for Social Security and Medicare. But if you’re self-employed and have to pay the full 15.3% tax yourself (instead of splitting it 50-50 with an employer), you do get to write off half of what you pay. That deduction comes on the face of Form 1040, so you don’t have to itemize to take advantage of it.
Waiver of Penalty for the Newly Retired
This isn’t a deduction, but it can save you money if it protects you from a penalty. Because our tax system
operates on a pay-as-you earn basis, taxpayers typically must pay 90% of what they owe during the year via
withholding or estimated tax payments. If you don’t, and you owe more than $1,000 when you file your return,
you can be hit with a penalty for underpayment of taxes. The penalty works like interest on a loan—as though
you borrowed from the IRS the money you didn’t pay. The current rate is 3%.
There are several exceptions to the penalty, including a little-known one that can protect taxpayers age 62 and
older in the year they retire and the following year. You can request a waiver of the penalty—using Form 2210—if you have reasonable cause, such as not realizing you had to shift to estimated tax payments after a lifetime of meeting your obligation via withholding from your paychecks.
Amortizing Bond Premiums
If you purchased a taxable bond for more than its face value—as you might have to capture a yield higher than
current market rates deliver—Uncle Sam will effectively help you pay that premium. That’s only fair, since the
IRS is also going to get to tax the extra interest that the higher yield produces.
You have two choices about how to handle the premium.
You can amortize it over the life of the bond by taking each year’s share of the premium and subtracting it from the amount of taxable interest from the bond you report on your tax return. Each year you also reduce your tax basis for the bond by the amount of that year’s amortization.
Or, you can ignore the premium until you sell or redeem the bond. At that time, the full premium will be included in your tax basis so it will reduce the taxable gain or increase the taxable loss dollar for dollar.
The amortization route can be a pain, since it’s up to you to both figure how each year’s share and keep track
of the declining basis. But it could be more valuable, since the interest you don’t report will avoid being taxed in your top tax bracket for the year—as high as 43.4%, while the capital gain you reduce by waiting until you sell or redeem the bond would only be taxed at 0%, 15% or 20%.
If you buy a tax-free municipal bond at a premium, you must use the amortization method and reduce your basis each year . . . but you don’t get to deduct the amount amortized. After all, the IRS doesn’t get to tax the interest.
Legal Fees Paid to Secure Alimony
Although legal fees and court costs involved in a divorce are generally nondeductible personal expenses, you may be able to deduct the part of your attorney’s bill. Since alimony is taxable income, you can deduct the part
of the lawyer’s fee that is attributable to setting the amount. You can also deduct the portion of the fee that is attributable to tax advice. You must itemize to get any tax savings here, and these costs fall into the category of miscellaneous expenses that are deductible only to the extent that the total exceeds 2% of your adjusted gross income. Still, be sure your attorney provides a detailed statement that breaks down his fee so you can tell how much of it may qualify for a tax-saving deduction.
Don’t Unnecessarily Report a State Income Tax Refund
There’s a line on the tax form for reporting a state income tax refund, but most people who get refunds can simply ignore it even though the state sent the IRS a copy of the 1099-G you got reporting the refund. If, like most taxpayers, you didn’t itemize deductions on your previous federal return, the state tax refund is tax-free.
Even if you did itemize, part of it might be tax-free. It’s taxable only to the extent that your deduction of state
income taxes the previous year actually saved you money. If you would have itemized (rather than taking the standard deduction) even without your state tax deduction, then 00% of your refund is taxable—since 100% of your write-off reduced your taxable income. But, if part of the state tax write-off is what pushed you over the standard deduction threshold, then part of the refund is tax-free. Don’t report any more than you have to.
Cleaning and laundering services when traveling are deductible as long as they aren’t reimbursed by your employer.
Looking for a new job
Costs associated with looking for a new job in your present occupation, including fees for resume preparation and employment of outplacement agencies are deductible.
If you belong to a labor union and you pay dues every year (typically withdrawn from your paycheck),
Higher education costs
You can deduct education expenses (books, courses, etc.) to the extent that they required by law
or your employer or if they are needed to maintain or improve your skills.
If you are required to wear protective clothing at work (often the case for electricians, carpenters,
chemical workers etc…), you can deduct that expense.
As part of unreimbursed employee expenses, you can also deduct annual or less subscriptions to professional journals as well as trade or business tools, like software, as long as these expenses are appropriate and helpful in your business.
Damage, destruction and theft
Casualty losses, including damage, destruction or loss of property resulting from a sudden, unexpected or unusual event are deductible. You can find a list of losses that are deductible on the IRS website. There’s also a deduction for theft losses. The deduction for casualty and theft loss is limited so you’ll need to calculate it precisely.
You can deduct medical expenses that go toward qualified long-term care services and premiums paid for qualified long-term care insurance contracts.
You can deduct fees for counsel and advice about investments that produce taxable income, including any amount you may have paid for investment advisory services.
The Fiscal Times
Home Energy Credits Save Money and Cut Taxes You can trim your taxes and save on your energy bills with certain home improvements. Here are some key facts to know about home energy tax credits:
Non-Business Energy Property Credit
Part of this credit is worth 10 percent of the cost of certain qualified energy-saving items you added to your main home last year. This may include items such as insulation, windows, doors and roofs.
The other part of the credit is not a percentage of the cost. It is for the actual cost of certain property. This may include items like water heaters and heating and air conditioning systems. The credit amount for each type of property has a different dollar limit. This credit has a maximum lifetime limit of $500. You may only use $200 of this limit for windows.
Your main home must be located in the U.S. to qualify for the credit. Be sure you have the written certification from the manufacturer that their product qualifies for this tax credit. They usually post it on their website or include it with the product’s packaging. You can rely on it to claim the credit, but do not attach it to your return. Keep it with your tax records.
You may claim the credit on your 2015 tax return if you didn’t reach the lifetime limit in past years. Under current law, this credit is available through Dec. 31, 2016.
Residential Energy Efficient Property Credit
This tax credit is 30 percent of the cost of alternative energy equipment installed on or in your home. Qualified equipment includes solar hot water heaters, solar electric equipment, wind turbines and fuel cell property. There is no dollar limit on the credit for most types of property. If your credit is more than the tax you owe, you can carry forward the unused portion of this credit to next year’s tax return.
The home must be in the U.S. It does not have to be your main home, unless the alternative energy equipment is qualified fuel cell property. This credit is available through 2016.
Let us help you become tax compliant. Non-compliance may have serious consequences.
We’ll help you with accounting and taxation so that you can concentrate on your business.
Knowledge empowers us to do things right, to be creative, productive and maximize our potential.
We assist buyers with the selection of their investment structures and guide them thru the intricacies of FIRPTA.
We’ll help you with accounting and taxation so that you can concentrate on your business.
Avoid wasting time and money trying to do it yourself. You might save a lot by letting us do it for you.