10 Often Overlooked Tax Deductions
Jan 25th 2011 12:00PM
Updated Jan 31st 2011 4:34PM
In life, you can't win the game if you don't know all the rules, and paying your taxes is no different. Every tax deduction or tax credit that you miss means more money out of your pocket and into Uncle Sam's.
But our tax code is so complex -- it is 70,000 pages, after all -- that even IRS Commissioner Doug Shulman admits he hires someone to help do his taxes. So personal finance experts Ken and Daria Dolan of Dolans.com are here to make sure you don't miss out on these 10 commonly overlooked tax deductions.
We all should pay our fair share...but let's make sure you don't pay one penny more!Overlooked State Tax Deduction
If you paid any state income taxes in the Spring because you owed taxes when you filed your returns, remember to count it toward your 2010 state income tax deduction.
Here's another often-overlooked deduction relating to your state taxes -- the state sales tax deduction. The state sales tax deduction has been extended through 2011.
So you can choose whether to deduct your state and local income tax, OR your state sales tax. Most times, the state and local income tax will win out, but this is a great deduction if you live in a state that doesn't have income tax.
The easiest way to decide which deduction is right for you is to use the IRS's tax tables that show how much residents of each state can deduct.
Tax Deductions for "Going Green"
There have been so many special tax credits and deductions the last two years, it's hard to keep track. The tax credit for buying a new vehicle expired in 2009, but if you made an effort to "go green" in 2010, Uncle Sam wants to reward you by putting a few extra dollars in your pocket.
Unlike deductions against your income, these are actual tax credits, and tax credits are subtracted directly from the bottom-line tax that you owe.
You can get a tax credit of up to 30% of your cost for approved energy-efficient heating and cooling products, such as solar water heaters, geothermal heat pumps and others. There is no maximum dollar amount on this deduction.
Plus, you can get a tax credit of 30% of your cost -- up to a maximum of $1,500 -- on approved energy-saving home improvements. If you made any improvements to make your primary residence (not a second or rental home) more energy efficient, such as installing energy-efficient HVAC heating and cooling systems, replacing windows, insulating your attic, adding storm doors, etc., don't overlook this tax credit.
Important note: The $1,500 cap covers both 2009 AND 2010 combined.
Overlooked Tax Deduction for Homeowners
If you took out a first mortgage or refinanced after Jan. 1, 2007, and are paying private mortgage insurance (PMI), you can deduct that expense. Simply use Line 13 on Schedule A -- the same form that you use to deduct mortgage interest and property taxes.
Your lender should make this easy by telling you the amount of your PMI premium in Box 4 of your Form 1098.
This deduction is scheduled to disappear after 2010, so make the most of it now.
Overlooked Tax Deductions for Investors
Funny how so many investors can be so careful with how they invest their money, yet careless when it comes to deducting investment-related expenses on their taxes. Don't let that be you.
Be sure to write off any and all investment publications to which you subscribe. And don't forget other investment-relating expenses, such as your financial adviser's annual fees, mileage for visits to your broker or financial adviser, safety deposit boxes and other investment fees that you may pay directly.
Overlooked Way to Deduct Baggage Fees
If you are a business traveler, you may be able to deduct those annoying airline baggage fees. If you need to bring material or supplies on a business trip and have to check that baggage, you can deduct those fees as business expenses.
Overlooked Deductions for Volunteers
If you work with a charity, be sure you take a deduction for the miles you drive related to your charity work. For 2010, the mileage rate remains unchanged at 14 cents per mile. If this little-used tax break applies to you, take advantage of it.
Plus, don't forget your other charitable out-of-pocket expenses. For example, if you donated food to the bake sale or a soup kitchen, if you made blankets for the homeless shelter, or donated materials for your school's fund-raising campaign, they are all deductible as charitable contributions.
Tax Credit for Working Parents
Don't skip this one... it's really a tax credit and not a deduction. If you pay for child care, including day care or nanny services, you can reduce your taxes up to $3,000 for a single child or up to $6,000 for two or more children under the age of 13.
The amount of the credit ranges from 20% to 35% of your child-care costs, depending on your gross income. For example, if your income is $43,000 or more, you can claim a 20% credit on your child-care costs. So if you have one child and you spend $8,000 a year on child care, you can save 20% off the first $3,000 -- or $600.
As always, certain "rules" apply, so be sure to check with your tax adviser.
Overlooked Tax Deductions When You Sell Your Home
If you were lucky enough to sell your home last year, you have some tax deductions coming to you. You can deduct the costs associated with selling your home, including the commission you paid your real estate agent, any legal fees and closing costs.
Overlooked Deductions for College Loans
Here's a loophole that lets kids deduct student loan interest. If a parent pays back a student loan for a child who they do not claim as a dependent, then that child can deduct up to $2,500 of that student loan interest. The IRS treats the money like a gift that was used by the child to pay the debt.
Best yet, the child does not have to itemize to take this deduction.
Overlooked Deduction for Tax Prep
Our tax code is so ridiculously complex that 60% of all taxpayers hire professional help. If you are one of them, be sure that you deduct whatever you paid your tax adviser in 2010.
In fact, be sure you deduct ANY costs pertaining to tax planning. These are easy to forget because they really fall under the category of "miscellaneous" itemized expenses.
In addition to your tax preparer's fees, you can deduct portions of any legal or accounting fees related to your taxes. Meaning if you sat down with an attorney to review your estate, and you spent a part of that time reviewing the tax implications, that time would be tax deductible.
There you have it... a dozen overlooked tax deductions that many people miss. Don't you be one of them -- every deduction equals more money in your pockets.
Doing your taxes has turned into a game of "gotcha" -- and most taxpayers lose. Let us help level the playing field with simple tips for making your tax deductions airtight and by making sure you know all the new 2010 tax changes that apply to you.
Correction: This story was corrected on Monday, January 31. A previous version of this story said that taxpayers who don't itemize could increase their standard deduction by the amount of real property tax they could have claimed if they did itemize - up to $500 ($1,000 on a joint return). Under the current tax law, that is no longer allowed. We regret the error.
We have also updated the story to include a new deduction regarding student loans.
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