Don't Overlook These Tax Deductions
byFeb 6th 2014 6:00AM
2013 was a great year for many investors, but there's a downside. All those market gains may have left you with a lot more income to report.
Successful investing isn't exactly a problem, but it does mean that it's especially important not to overlook useful tax deductions when you prepare your paperwork for the IRS.
One of the most important things to do when calculating your possible deductions is to go over your major life changes in the past year. Many families go through events -- divorce, a college graduate moving back home -- that can make them eligible for important tax deductions.
"Dependents are probably my number one overlooked deduction," said Mark Steber, chief tax officer at Jackson Hewitt. "We live in a modern world with modern family rules. Dependents, whether they are your children or a spouse's parent or a foster child or an ex-spouse's child -- make sure your tax expert understands both the rules and your situation."
A natural disaster can also leave you with a deduction. If you suffered a loss from an event that becomes a federally declared disaster, you can deduct the loss. Be careful, though: Any compensation from an insurer or someone else for the loss will reduce or eliminate your deduction.
"It's sheer speculation on my part, but I think a lot of taxpayers may accidentally deduct things that they don't realize are going to be paid by insurers," said Melissa Labant, director of tax advocacy for the American Institute of Certified Public Accountants. "They truly are trying to do the right thing, but they may not know that insurance is going to cover it."
If you donate goods in the course of a year, you can take deductions equal to their value. Just be careful not to be too generous in your valuations: The IRS and others publish guidelines on how much to deduct for clothing, household items and other goods you give away.
Self employed workers, whose ranks have been swelling, have additional opportunities for deductions. For example, medical, dental, or long term care insurance costs may all be deductible.
"I'm not sure people realize how good that is," said Cathy Curtis, president of Curtis Financial Planning. "Now it's 100 percent of your premium. It's a fantastic benefit." You may also be able to deduct health insurance for an adult child under age 27.
Many of us have elderly parents to care for, and the government makes that just a little easier with a tax deduction. Taxpayers can claim a credit equal to a percentage of the work-related expenses -- the payments that enable the taxpayer to work or continue working -- for the caregiver. This credit can be as high as $3,000, according to Curtis. "I"m sure that is a biggie for a lot of people now," she said.
Investors also have some nice tax deductions available. There are a number of small ones, like a tax preparer's fee or the cost of renting a safe deposit box.
Mortgage interest is deductible, of course, but it is also possible to deduct points on a mortgage in the year you take it out.
If you refinanced a mortgage in 2013 and paid points, you can deduct those points as well, provided you do it in equal amounts every year over the life of the loan.
"I've seen clients try and take them all at once, or not take them at all," Curtis said.
Congress allowed several tax deductions to expire at the end of 2013, but financial planners are holding out hope that at least some of them will be reinstated. One such deduction is for state sales taxes. Until the end of 2013, if you paid more in sales taxes than in state income taxes, you could deduct those instead. Sales tax calculations can take time, but if you made some big purchases in the last year, or live in a state with high sales taxes or no state income taxes, it's possible to uncover a bigger deduction.
Another expired deduction was particularly popular with affluent retirees. It allowed them to take their required minimum distribution from an IRA, donate up to $100,000 of it to charity, and exclude the donated amount from income.
"I've got some people who want to take their required minimum distribution early in the year, but they want to take advantage" of the deduction if it is reinstated, Curtis said. "I'm telling them to wait. It's a paperwork mess."
Tallying deductions can be time consuming, no doubt about it. But after the year we had in the markets, it's a chore not to avoid.
More from CNBC
- The Obamacare Tax Deconstructed
- There's Still Time to Trim Your Tax Bill
- 7 Tech Tools to Make Tax Prep Less Frustrating