The 13 most overlooked tax deductions

December 12, 2007 at 10:34 am Leave a comment

According to the IRS, millions of taxpayers overpay in taxes every year. With the year coming to an end and the tax season in sight, find out which deductions can keep you from paying Uncle Sam more than he’s due.

1. State sales taxes
If you live in a state that doesn’t impose an income tax, you can actually write off sales taxes. If you pay state income taxes, its’ recommended to simply pay those. Simply use this IRS calculator to figure out an estimated deduction based on your state and income level.

2. $250 educators’ expenses
Teachers are allowed to deduct up to $250 in annual expenses for books and classroom supplies. Simply put your deduction on line 23 of the Form 1040. There’s no need to itemize.

3. College tuition
If you’re income is too high to qualify for the Hope or Lifetime Learning credit, you may qualify for a $4,000 deduction for paying college tuition for yourself, a spouse, or a dependent. There’s also no need to itemize.

4. Student loan interest paid by mom and dad
If parents pay off student loans incurred by their kids, they are now eligible to deduct up to $2,500 of interest paid on the loan(s). The child cannot be a dependent to qualify. Find out more

5. Out-of-pocket charitable contributions
Don’t overlook your charitable contributions. It’s easy to forget the small donations, but these add up throughout the year and you are allowed to write-off any out-of-pocket expenses incurred for doing good works. Find out more

6. Moving expense to take first job
Job hunters that drove over 50 miles to get to their first job, can deduct expenses incurred for relocation, that means getting you and your stuff to the new location. If you drove your own vehicle, you can also include 20 cents a mile and parking fees and tolls.

7. Military reservists travel expenses
National Guard or military reservists can deduct travel expenses to drills and/or meetings if it was more 100 miles and an overnight stay was required. For those that qualify, deductions include cost of lodging, half the cost of meals, 48.5 cents per mile and/or parking and toll fees for driving your own vehicle. Again, there’s not need to itemize.

8. Child-care credit
Even if you pay your child-care bills through a reimbursement account at work, you are still eligible to claim a child-care credit. The child-care credit can be applied to up to $6,000, for two or more children, but there is a $5,000 limit on reimbursement accounts. You can, however, run the $5,000 through your plan at work, and claim the credit on the extra $1,000 which can cut your tax bill by about $200. Find out more

9. Estate tax on income in respect of a decedent
This deduction can be huge if you inherited an “IRA from someone whose estate was big enough to be subject to the federal estate tax.” If the IRA was $100,000, it would be subject to about $45,000 estate taxes. As you withdraw money however, you can deduct a proportionate amount of the tax paid. For instance, if you withdraw $50,000 one year, you can “claim a $22,500 itemized deduction on Schedule A.”

10. State tax you paid last spring
If you filed your 2006 state tax return in the spring of 2007, be sure to include your state tax deduction in you 2007 returns along with withholdings from paychecks or 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 is more a subtraction than a deduction, but many taxpayers miss it. “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
If you’re a salaried employee, you can deduct the jury fees charged in your name to your employer. Since these fees are considered by the IRS to be taxable income, you can deduct the money, eventhough you never saw it. Look for the line in your tax form.

Source: Kiplinger

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Entry filed under: Taxes.

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