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The 13 Most Overlooked Tax Deductions
content.kiplinger.com — Some really good deductions that I didn't even realize you could take. Such as college tuition, moving expenses to take your first job and jury pay paid to employer. Good list and helpful now that tax time is almost here!
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- BlueScreenOD, on 10/12/2007, -9/+181. State sales taxes. As part of the last-minute tax package last December, Congress resurrected the chance for taxpayers to deduct state and local sales taxes. Although all taxpayers have a shot at this write-off, it makes sense primarily for those who live in states that do not impose an income tax. You must choose between deducting state income taxes or state sales taxes and, for most citizens of income-tax states, the income-tax deduction is a better deal. You won't find this break mentioned on the tax forms, but here's how to claim this deduction: Enter your write-off on line 5 of Schedule A and write "ST" on the dotted line to the left of that line. IRS even has a calculator on its Web site to help you figure the deduction, which varies by your state and income level.
2. $250 educators' expenses. This break, too, lost its place on the tax forms because it expired at the end of 2005 and wasn't reinstated until the 2006 forms were set. Still, teachers and their aides can deduct up to $250 they spent in 2006 for books and classroom supplies. If you qualify, put your deduction on line 23 of the Form 1040, the line now used for the Archer medical savings account (MSA) deduction, and write "E" on the dots to the left. If you also claim the MSA deduction, write "B" (for both) on the line and attach a breakdown of how much you're claiming for each. You get this deduction regardless of whether you itemize.
3. College tuition. You won't find this one on the forms, either, but you may qualify to deduct up to $4,000 you paid in college tuition in 2006 for yourself, your spouse or a dependent. This break can pay off if your income is too high to qualify to claim the Hope or Lifetime Learning credit. For 2006 returns, the deduction is taken on line 35 of the Form 1040, the line for the domestic production deduction. Write "T" to the left of that line. If you're claiming the production break, too, write "B" on the dotted line and attach a breakdown of how much you're claiming for each. You also get to claim this deduction regardless of whether you itemize.
4. Student loan interest paid by mom and dad. Until recently, if parents paid back a student loan incurred by their children, no one got a tax break. To get a deduction, the law held 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, 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.
5. Out-of-pocket charitable contributions. It's hard to overlook the big charitable gifts you made during the year, 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 works. 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 in 2006, deduct 14 cents a mile, unless you were doing Hurricane Katrina relief work. In that case, you get 32 cents a mile.
6. Moving expense to take first job. Here's an interesting dichotomy: 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 the cost of getting yourself and your household goods to the new area, including 18 cents a mile (and parking fees and tolls) for driving your own car.
7. Military reservists travel expenses. If you are a member of the National Guard or military reserve, you may deserve a deduction for travel expenses to drills or meetings. To qualify, you must travel more than 100 miles and be away from home overnight. If you qualify, you can deduct the cost of lodging and half the cost of your meals, plus 44.5 cents a mile (and any parking or toll fees) for driving your own car. You get this deduction regardless of whether you itemize.
8. 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. But it's easy to overlook the child-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. And, 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.
9. 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 balance. Let's say you inherited a $100,000 IRA, and the fact that the $100,000 was included in your benefactor's estate added $45,000 to the estate tax bill. As you withdraw the money from the IRA and pay tax on it, you also get to deduct a proportional amount of the estate tax paid. If you withdraw $50,000 in one year, for example, you get to claim a $22,500 itemized deduction on Schedule A.
10. State tax you paid last spring. Did you owe tax when you filed your 2005 state tax return in the spring of 2006? Then remember to include that amount with your state-tax deduction on your 2006 return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments.
11. Refinancing points. When you buy a house, you get to deduct points paid to get your mortgage in one fell swoop. When you refinance a mortgage, though, you have to deduct the points over the life of the loan. That means 1/30th 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. And, in the year you pay off the loan -- because you sell the house or refinance again -- you may get to deduct all as-yet-undeducted points. You do unless you refinance with the same lender. In that case, you add points on the latest deal to the leftovers from the previous refinancing and deduct the expense ratably over the life of the new loan.
12. Reinvested dividends. This isn't really a deduction, but it is a subtraction that can save you money ... and this is the break former IRS Commissioner Fred Goldberg told Kiplinger's that lots of taxpayers miss. If, like most investors, you have mutual fund dividends automatically invested in 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 -- which you subtract from the proceeds of sale to pinpoint your gain -- means overpaying your tax.
13. Jury pay paid to employer. Here's a break that's not as easy to miss this year as in the past: Jury pay you turned over to your 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 corporate treasury. The only problem is that the IRS demands that you report those fees as taxable income. You've always had a right to deduct the amount, so you weren't taxed on money that simply passed through your hands. But this is the first year the tax forms include a line dedicated to this deduction. Enter it on line 13 if you file the Form 1040A or on line 34 if you use the full-fledged 1040. - jtrost, on 10/12/2007, -0/+34. Student loan interest paid by mom and dad. Until recently, if parents paid back a student loan incurred by their children, no one got a tax break. To get a deduction, the law held 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, 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.
Now I have a reason to pay my accrued interest even though the lending company doesn't make me start paying until after I graduate :)- stuartbryant, on 10/12/2007, -0/+4No you don't. The interest payments would exceed the amount you'd save from the tax deduction.
- PotatoSalad, on 10/12/2007, -0/+7Fair tax anyone?
- argoff, on 10/12/2007, -1/+2A fair tax, is not one that is simple, not a sales tax, not an income tax, not a property tax, not one that encourages savings, not one that nicks everybody equally, nor one that nicks people in proportion to their wealth.
A fair tax is a tax that is done without coercion. - PotatoSalad, on 10/12/2007, -0/+2I was referring to the Fair Tax: http://www.fairtax.org
Not some philosophical term. - argoff, on 10/12/2007, -0/+1@PotatoSalad,
I know you were referring to the "fair tax" and not a fair tax. But the problem isn't with the government failing to tax people in a clean, nifty way. The problem is that they have too much power to coerce peoples money away from them to begin with. - PotatoSalad, on 10/12/2007, -0/+1I agree, I think the IRS should be eliminated from the whole picture. The fair tax is one step in that direction (in my opinion).
- argoff, on 10/12/2007, -1/+2A fair tax, is not one that is simple, not a sales tax, not an income tax, not a property tax, not one that encourages savings, not one that nicks everybody equally, nor one that nicks people in proportion to their wealth.
- jerbaker, on 10/12/2007, -0/+6Remember that tax deductions aren't worth anything if they don't exceed your standard deduction. If all of your itemized deductions don't exceed $5,150 for single people or $10,300 for married people, it isn't worth doing.
- maino82, on 10/12/2007, -1/+5if your employer reimburses you for moving expenses you can't deduct them. don't learn that one the hard way kids.
- Urusai, on 10/12/2007, -0/+2Hey, my salary is practically charity, I should be able to write it all off.
- loqqq, on 10/12/2007, -0/+2Actually, you can deduct moving expenses even if it is not your "first job."
http://www.irs.gov/taxtopics/tc455.html - dcdanman, on 10/12/2007, -2/+3Wow, a tax story and no one is telling you that there is no law to make you pay income tax!
- Krymore, on 10/12/2007, -0/+3Most people in this country have realized by now that a piece of paper is fine and dandy, but the people with the guns make the rules.
- Rivetgeek, on 10/12/2007, -0/+3no theres a thing called the ratification of the 16th amendment. Amusingly enough Feb 3 1913 was the day it was ratified.
- Arcadian, on 10/12/2007, -0/+2That's nice and all, Rivetgeek, but I believe it was ratified unconstitutionally.
Not that I'm not going to fill out Income Tax this year, I think I'm getting something back.
- TSAU956, on 05/12/2008, -1/+1I like how when it comes to jury duty everyone says "It's your civic duty!" but that's really the only thing there is that you have to do. I thought there would be other civic duties out there, but there's nothing else that's mandatory.
- ChewyBass, on 10/12/2007, -0/+2Here is one that I found. Last summer I bought the wife a new vehicle. The sales tax that you paid is deductible. You can either use the formula to find you deduction or use the IRS calculation for the amount. I paid $1405 in sales tax and this increased my refund by a little over $500.
- AriaStar, on 10/12/2007, -0/+2Look, unless you know what you're doing, err on the side of caution. I doubt saving $50 is worth being audited. I use Quicken TurboTax (no, I don't work for them), and have since I was 18. That program will walk you through all of these things and will help you determine if something is allowable. Using it, I've paid exactly $0 in state and federal taxes my entire adult life. Don't try to figure it out on your own. If in doubt, hire someone.
- argoff, on 10/12/2007, -1/+3Nice deductions, but in all fairness, these are hoops. Like at the dolphin show where they are are always feeding them fish "to keep them in the game". It's sort of a slap in the face how they take all this money from people, and then they feed them a few tokens back to make sure they are always filing taxes and are always in the system. A healthy response would be to break the law and earn money without informing anyone of what you make. It's no one elses business anyhow. Think of it like file sharing, for every person that they string up as an example - there are thousands that they simply can't touch.
- kaelyiesta, on 10/12/2007, -1/+2You hit the nail on the head. This tedious ***** shouldn't be necessary at all in the first place. I'd rather do 10 times the amount of work doing something worthwhile than this crap. Such a boring waste of time.
- martx80, on 10/12/2007, -0/+0Paying taxes is a simple means to guaranty we live in an ordered society without people running amok. I'm personally happy to have a portion taken out of my paychecks to make sure we don't slip into chaos. But I will also use every trick and deduction allowed to try and get as much of that tax refunded to me.
- martx80, on 10/12/2007, -0/+0Think about paying taxes as fee to the government(Federal, State, and Local) to make sure you will be able to have freedoms tomorrow.
- karenrob, on 02/22/2008, -0/+0People can qualify for more tax deductions by having a home business, even it it's just a small one. By being creative, you can turn many expenses you would have anyhow, at least partially, into business expenses. If you are not making as much money at your business as these expenses amount to, you can deduct them against your other income. There are two free ebooks available at http://www.become-a-secret-shopper.com/tax-deducti ... that give tips on many deductions you can take if you work for yourself even on a small part-time basis.
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