Eight Commonly Overlooked Tax Deductions
To maximize your deductions, it's a good idea to familiarize yourself with tax rules -- there are likely many deductions you're missing out on.
A number of deductions that get overlooked quite a bit are called "deductions subject to the 2% limit." These deductions are only deductible to the extent that they are more than 2% of your adjusted gross income (AGI). You figure your total deductions subject to the 2% limit on Schedule A by subtracting 2% of your AGI from the total amount of these expenses. For example, if your AGI is $40,000, your deduction would be limited to those expenses over $800 (2% of $40,000).
To get you started, here's a list of eight commonly overlooked tax deductions subject to the 2% limit:1. Job Hunting Expenses. While you can't deduct the cost of looking for your first job (sorry, new grad!), you can deduct out-of-pocket expenses related to your job hunt if you've been laid off or are simply moving on. This includes paper, printing and stamps for your resume; online expenses to post your resume; fees paid to employment agencies; travel to and from interviews; long distance calls to prospective employers; and the costs of getting a portfolio or other work samples together. You must be looking for a job in the same profession -- you cannot deduct the cost of looking for a job in a new profession. You also can't deduct job expenses if there has been a "substantial break" between leaving your last job and starting to look for a new job. You don't have to have success within a reasonable amount of time, but you do need to be looking.
2. Licenses and Regulatory Fees. You can deduct the amount you pay each year to state or local governments for licenses and regulatory fees for your trade, business or profession. This is good news for everyone from manicurists to attorneys who have to pay annual fees to stay in business.
3. Appraisal Fees. You can deduct the cost of appraisal fees if you pay them to figure a casualty loss or the fair market value of donated property for charitable purposes.
4. Tax Preparation Fees. You can claim a deduction for out-of-pocket expenses paid for tax preparation software, tax publications and the costs associated with electronic filing. Those expenses would be deducted in year paid, not necessarily for the year of the return (for example, fees paid in 2011 would be reported on your 2011 return, not your 2010 return).
5. Investment Fees and Expenses. You can also deduct investment fees, custodial fees, trust administration fees and other expenses you paid for managing your investments that produce taxable income.
6. Safe Deposit Box Rent. As with investment expenses, you can deduct safe deposit box rent if you use the box to store taxable income-producing stocks, bonds or investment-related papers and documents. You cannot deduct the rent if you use the box only for jewelry or other personal items like birth certificates.
7. Legal Fees Associated With Tax Advice. Generally, individual taxpayers cannot deduct ordinary legal fees. However, you can deduct legal fees to determine, contest, pay or claim a refund of any tax. It makes paying a lawyer a little less painful.
8. Credit Card Fees Used to Pay Taxes. You can deduct the convenience fee charged by your bank or third party processor when you pay your income tax (including those pesky estimated tax payments) by credit or debit card. The fees are deductible on the return for the year in which you paid them. That means fees charged to payments made in 2010 can be claimed on the 2010 tax return.
Don't miss out on tax breaks you might be entitled to, especially when it comes to little-known deductions. With a bit of research (or the help of a paid preparer or software package), you can maximize your deductions and keep more of your money from Uncle Sam.