The Most Overlooked Tax Deductions

Every year millions of taxpayers overpay their taxes because they don’t take tax breaks they are entitled to. Kiplinger made a list of the 24 IRS-approved most overlooked tax deductions you can’t afford to miss out on. They are:

State Sales Tax. If you live in a state that does not impose a state income tax, you can still deduct sales tax you paid. And if you do live in a state that has an income tax, you may be better off deducting state sales tax instead of state income tax. 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. You may come out ahead deducting the sales tax, especially if you made a big purchase in 2015, such as a vehicle. Here is the IRS sales tax calculator.
Reinvested Dividends. This isn’t a tax deduction, but it’s a big subtraction that a former IRS Commission told Kiplinger is commonly missed. Kiplinger says, “If, like most investors, you have mutual fund dividends 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 reinvested dividends in your basis results in double taxation of the dividends—once in the year when they were paid out and immediately reinvested and later when they’re included in the proceeds of the sale.” Don’t make that costly mistake.
Out-of-pocket Charitable Deductions. Most people remember to deduct money they directly gave to charities. But many forget the little things they do for charitable organizations that can add up. If you drive your car for charitable purposes, you can deduct 14 cents per mile, plus tolls and parking. If you donate a casserole to a soup kitchen, you can deduct the ingredients. Keep track of your miles and keep your receipts. It adds up! But remember, if your deduction totals more than $250, you need a receipt from the charity acknowledging it.
Student-Loan Interest Paid by Mom and Dad. If mom and dad paid back your student loan, you can deduct up to $2,500 of the interest as having been paid by you. As long as you are no longer claimed as a dependent by your parents. The IRS treats it as if the money were given to the child, who then paid the debt. And you don’t have to itemize in order to receive the benefit. Unfortunately, mom and dad can’t claim the interest deduction even though technically they paid the debt.
Job-Hunting Costs. If you looked for work in 2015 hopefully you kept track of your job-hunting expenses. As long as you are looking for work in the same line of work, your expenses are deducted as miscellaneous deductions. However, they can only be deducted if they exceed 2% of your adjusted gross income. And job-hunting expenses for your first job don’t qualify.
Moving Expenses to Take Your First Job. This is another one you can deduct even if you don’t itemize. However, the job must be at least 50 miles away from your old home. You can deduct the cost of getting yourself and your household goods to your new location. And if you drive yourself, you can deduct 23 cents a mile plus parking and tolls. IRS Publication 521 has all the details.
Military Reservists’ Travel Expenses. Members of the National Guard or military reserve may write off the cost to travel to drills or meetings. The rate is 57.5 cents per mile, plus tolls and parking. However you must travel more than 100 miles from home and stay overnight. You can also deduct the cost of lodging and half your meal costs.
Deduction of Medicare Premiums for the Self-Employed. If you continue to run your own business after qualifying for Medicare, then you can deduct the premiums you pay for Medicare Part B and D, plus the cost of supplemental Medicare policies or Medicare Advantage. It’s available whether or not you itemize. However, you can’t claim it if you have a second job and are eligible for insurance through that employer or eligible under a spouse’s job.
Child-Care Credit. A credit is better than a deduction because it reduces your tax bill dollar for dollar. You can qualify for a tax credit worth between 20-35% of what you pay for child-care while you work. But if your boss offers a child-care reimbursement account funded with pretax dollars, that’s usually an even better deal. You can’t double tip and get a credit for both. But if your expenses are more than were in your reimbursement account, then you can claim that additional amount.
Estate Tax on Income in Respect of a Decedent. This is for you 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. Look at slide 11 here for an example.
State Tax Paid Last Spring. If you paid additional 2014 state income taxes when you filed your taxes last spring, don’t forget to deduct it on your 2015 federal tax return. This is often overlooked!
Refinancing Points. When you initially buy a house, you get to deduct all the points you paid in the next years tax return. When you refinance, though, you have to deduct the points you paid over the life of the loan. That means if it’s a 30 year mortgage you get to deduct 1/30th on your taxes each year. And if you sell the home or refinance again, you get to deduct all the as-yet-undeducted points. With one exception. If you refinance with the same lender, you add the points paid on the latest deal to the leftovers from the previous refinancing, then deduct it gradually over the life of the new loan.
Jury Pay Paid to Employer. Many employers continue to pay you if you are called to jury duty and some of them have you pay them the money you get for jury duty. However, the IRS demands you report the jury pay as taxable income. But you can deduct the amount you gave to your employer by writing it in on Line 36 and write “jury pay” plus the amount on the dotted line. Look at slide 14 here for an example.
American Opportunity Credit. This is good for all four years of college, not just the first two like the Hope Credit was. There is a maximum annual credit per student of $2,500. If this credit exceeds your tax liability, you can get a refund, unlike most credits, which can only bring your liability to $0.
A College Credit for Those Long Out of College. The Lifetime Learning credit can be claimed for any number of years and can be used to offset the cost of higher education for yourself or your spouse . . . not just for your children. It’s worth up to $2,000 a year for post high school courses that lead to new or improved job skills. Classes you take even in retirement can count.
Those Blasted Baggage Fees. If you’re self-employed and traveling on business, don’t forget to add the baggage fees you paid to your deductible travel expenses.
Credits for Energy-Saving Home Improvements. There’s no longer a tax credit for some energy saving expenses like storm windows, but solar water heaters and geothermal heat pumps, among other alternative energy equipment, will still get you some credit.
Bonus Depreciation…And Beefed-up Expensing. Both of these are deductions that Congress includes in the law and lets expire and then renews. It seems to change from year to year. Currently, bonus depreciation is 50% of the cost of equipment in the year it was put into service, but it will change in later years. Supercharged expensing lets you write off the full cost of qualifying assets in the year it’s put into service. Congress recently made this one permanent. If you are a business owner don’t miss out on these two deductions.
Break on the Sale of Demutualized Stock. This is the stock that a life insurance policyholder receives when the insurer switches from being a mutual company owned by policyholders to a stock company owned by shareholders. The IRS says such stock has no tax basis, meaning when sold you have to pay taxes on 100% of the value. However, in some lawsuits the courts agreed with taxpayers that there is a tax basis, but the most recent ruling was in favor of the IRS. In the meantime, you have two choices. Claim a basis and then file an appeal when the IRS rejects it, or pay using zero basis and file a “protective refund claim” so you have the right to a refund if the courts finally come up with a definite answer in your favor.
Social Security Taxes You Pay. If you’re self-employed and pay the full 15.3% tax yourself, you do get to write off half of what you pay. And you don’t have to itemize to get it.
Waiver of Penalty for the Newly Retired. This isn’t a deduction, but it can save you money if you aren’t aware of it. You get so used to having taxes withheld from your paycheck that you don’t realize that once you retire you need to pay estimated taxes or you can get hit with a penalty for underpayment of taxes. If you owe more than $1,000 you will have to pay the penalty. The current interest rate is 3%. But, if you are age 62 and older, in the year you retire and the following year, you can request a waiver of the penalty if you have reasonable cause. Such as not realizing you had to pay estimated tax payments when you were used to it being withheld.
Amortizing Bond Premiums. Kiplinger says, “If you purchased a taxable bond for more than its face value—as you might have to capture a yield higher than current market rates deliver—Uncle Sam will effectively help you pay that premium. That’s only fair, since the IRS is also going to get to tax the extra interest that the higher yield produces.” There are two choices for how to handle it. Click here and look at slide 23 for more information.
Legal Fees Paid to Secure Alimony. Although legal fees and court costs for a divorce are not usually deductible, since alimony is taxable income you can deduct the portion of the legal fees attributable to setting the amount. Same with the portion attributable to tax advice. This falls under miscellaneous expenses and it needs to exceed 2% of your adjustable gross income. Be sure to get a detailed statement from your attorney.
Don’t Unnecessarily Report a State Income Tax Refund. If you didn’t itemize the previous year, the state tax refund is tax free. Even if you did itemize, a part of it may be tax free. If you would have itemized with or without taking a tax deduction, then you owe taxes on the refund. However, if the state tax write-off is what pushed you over the standard deduction threshold into itemized territory, then part of the refund is tax-free. So don’t report the refund unless you need to pay taxes on it.