The Most-Overlooked Tax Deductions
by Kiplinger Mar 22nd 2013 10:55AM
Cut your tax bill to the bone by claiming all the breaks you deserve – including some you may have forgotten or might have never known about. Take a look at the top missed deductions:
This is an especially dangerous issue for 2012 returns because, throughout 2012, this tax deduction simply didn't exist. The right for taxpayers to deduct state sales taxes paid expired at the end of 2011. Everyone expected Congress to revive the tax break sometime during 2012, but the issue got tangled up in fiscal cliff negotiations. Finally, in the bill approved Jan. 1, 2013, the deduction was restored ... retroactively for 2012 and for 2013 returns that will be filed next year.1. State Sales Taxes
This is particularly important to you if you live in a state that does not impose a state income tax. You see, Congress offers you the choice between deducting state income taxes paid or state sales taxes paid. You choose whichever gives you the largest deduction, of course, and if your state doesn't have an income tax, the sales tax write-off is clearly the way to go.
In some cases, even filers who pay state income taxes can come out ahead with the sales tax choice. The IRS has tables that show how much residents of various states can deduct, based on their income and state and local sales tax rates. But the tables aren't the last word. If you purchased a vehicle, boat or airplane, you may add the sales tax you paid on that big-ticket item to the amount shown in the IRS table for your state.
The same goes for any homebuilding materials you purchased. These add-on items are easy to overlook, but could make the sales-tax deduction a better deal even if you live in a state with an income tax. The IRS has a calculator on its website to help you figure the deduction.
2. Reinvested Dividends
This isn't really a tax deduction, but it is an important subtraction that can save you a bundle. And this is the break that former IRS commissioner Fred Goldberg told Kiplinger's that a lot of taxpayers miss.
If, like most investors, your mutual fund dividends are automatically used to buy extra shares, remember that each reinvestment increases your tax basis in the fund. That, in turn, reduces the taxable capital gain (or increases the tax-saving loss) when you redeem shares. Forgetting to include the reinvested dividends in your basis results in double taxation of the dividends -- once when they were paid out and immediately reinvested in more shares and later when they're included in the proceeds of the sale. Don't make that costly mistake.
If you're not sure what your basis is, ask the fund for help. (Starting with sales in 2012, mutual funds must report to investors -- and the IRS -- the tax basis of shares redeemed during the year. But note this: The new rule applies only to shares purchased in 2012 and later years. If you redeemed shares you purchased prior to 2012, it's still up to you to figure your basis. Don't forget those reinvested dividends!)
If you're among the millions of unemployed Americans who were looking for a job in 2012, we hope you kept track of your job-search expenses ... or can reconstruct them. If you're looking for a position in the same line of work, you can deduct job-hunting costs as miscellaneous expenses if you itemize. Qualifying expenses can be written off even if you didn't land a new job. In any case, such expenses can be deducted only to the extent that your total miscellaneous expenses exceed 2% of your adjusted gross income. Job-hunting expenses incurred while looking for your first job don't qualify. Deductible job-search costs include, but aren't limited to:
- Transportation expenses incurred as part of the job search, including 55.5 cents a mile for driving your own car plus parking and tolls
- Food and lodging expenses if your search takes you away from home overnight
- Cab fares
- Employment agency fees
- Costs of printing resumes, business cards, postage, and advertising
4. Moving Expenses to Take Your First Job
Although job-hunting expenses are not deductible when looking for your first job, moving expenses to get to that job are. And you get this write-off even if you don't itemize.
To qualify for the deduction, your first job must be at least 50 miles away from your old home. If you qualify, you can deduct the cost of getting yourself and your household goods to the new area. If you drove your own car on a 2012 move, deduct 23 cents a mile, plus what you paid for parking and tolls.
Members of the National Guard or the military reserves may tap a deduction for travel expenses 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 2012 travel, the rate is 55.5 cents a mile, plus what you paid for parking fees and tolls.5. Military Reservists' Travel Expenses
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 and the cost of supplemental Medicare (medigap) policies. This deduction is available whether or not you itemize and is not subject the 7.5% of AGI test that applies to itemized medical expenses. One caveat: You can't claim this deduction if you are eligible to be covered under an employer-subsidized health plan offered by 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.6. For the Self-Employed: Deduction of Medicare Premiums
7. Child-Care Credit
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. In the 25% bracket, each dollar of deductions is worth a quarter; each dollar of credits is worth a greenback.
You can qualify for a tax credit worth between 20% and 35% of what you pay for child care while you work. But if your boss offers a child care reimbursement account -- which allows you to pay for the child care with pre-tax dollars -- that might be an even better deal. If you qualify for a 20% credit but are in the 25% tax bracket, for example, the reimbursement plan is the way to go. (In any case, only amounts paid for the care of children under age 13 count.)
You can't double dip. Expenses paid through a plan can't also be used to generate the tax credit. But get this: Although only $5,000 in expenses can be paid through a tax-favored reimbursement account, up to $6,000 for the care of two or more children can qualify for the credit. So, if you run the maximum through a plan at work but spend even more for work-related child care, you can claim the credit on as much as $1,000 of additional expenses. That would cut your tax bill by at least $200.
8. 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 $35,000 to the estate-tax bill. You get to deduct that $35,000 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 $17,500 itemized deduction on Schedule A. That would save you $4,900 in the 28% bracket.
When you buy a house, you get to deduct in one fell swoop the points paid to get your mortgage. When you refinance, though, you have to deduct the points on the new loan over the life of that 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 -- not much, maybe, but don't throw it away.9. Refinancing Points
Even more important, in the year you pay off the loan -- because you sell the house or refinance again -- you get to deduct all as-yet-undeducted points. There's one exception to this sweet rule: If you refinance a refinanced loan with the same lender, you add the points paid on the latest deal to the leftovers from the previous refinancing -- and deduct that amount gradually over the life of the new loan. A pain? Yes, but at least you'll be compensated for the hassle.
10. Jury Pay Paid to Employer
Many employers continue to pay employees' full salary while they serve on jury duty, but some impose a quid pro quo: The employees have to turn over their jury pay to the company coffers. The only problem is that the IRS demands that you report those jury fees as taxable income. To even things out, you get to deduct the amount you give to your employer.
But how do you do it? There's no line on the Form 1040 labeled jury fees. Instead the write-off goes on line 36, which purports to be for simply totaling up deductions that get their own lines. Add your jury fees to the total of your other write-offs and write "jury pay" on the dotted line to the left.
Continue to Kiplinger for more of The Most-Overlooked Tax Deductions
More from Kiplinger:
- SLIDE SHOW: Extraordinary Tax Deductions
- QUIZ: Is It Deductible?
- SLIDE SHOW: IRS Audit Red Flags: The Dirty Dozen
- CALCULATOR: Set Your Withholding Right and Save