I prepare my own tax return and want to be sure I am taking advantage of every deduction I am entitled to. What are some common deductions that are often overlooked?
The IRS is very good about letting you know if you have omitted income. However, it is up to you to ensure you are taking all of the deductions and other tax benefits that can save you money. A few items that are frequently missed are set forth below.
Reinvested dividends. If you have mutual fund dividends automatically invested in additional shares, remember that each reinvestment increases your “tax basis” in the fund. This reduces the amount of taxable capital gain (or increases the tax-saving loss) when you sell your shares.
Charitable contributions. Most of us are unlikely to forget contributions made via check or payroll deduction to our favorite charities. However, don’t forget about the little things that also qualify as a tax deduction. You can write off out-of-pocket costs you incur while doing good deeds, including mileage incurred driving to a charitable activity (you can deduct 14 cents per mile), grocery charges for items being used at a non-profit soup kitchen, or the cost of craft materials you provided to a non-profit children’s charity.
State sales taxes. This write-off makes sense primarily for those who have residency in states that do not impose an income tax (for example Florida). You are allowed to deduct either state and local income taxes, or state and local sales taxes. Generally residents of the tri-state region are better off taking the income tax deduction.
Child and dependent care tax credit. You never want to miss a tax credit, which is significantly better than a deduction because credits reduce your tax bill dollar for dollar. So missing a credit is even more painful than missing a deduction that simply reduces the amount of income that’s subject to tax. People often overlook the opportunity to maximize the child and dependent care credit for child care bills paid through a reimbursement account at work. The law allows up to $5,000 of these expenses to be paid pre-tax through a tax-favored reimbursement account, however, up to $6,000 can qualify for the credit. So if you use the maximum $5,000 through a plan at work but spend more for qualifying child care, you can claim the credit on up to an extra $1,000.
Earned Income Tax Credit (EITC). The EITC is a refundable tax credit that can be as much as $6,269 for qualifying families. It’s designed to supplement wages for low-to-moderate income workers. Individuals and families who did not qualify for the EITC in the past may now qualify if their income has been reduced because of a job loss or a reduction in pay. The exact refund you receive depends on your income, marital status and family size, and you must file a tax return to receive it (even if you don’t owe taxes).
Student loan interest. If you’re in college, or have children currently attending classes, don’t forget this one. If Mom and Dad pay back the student loan, the 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, even if their parents foot the bill.
Refinancing mortgage points. When you buy a house, you get to deduct points paid to obtain your mortgage all at one time. When you refinance a mortgage, however, you have to deduct the points over the life of the 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.
State sales taxes. This write-off makes sense primarily for those who have residency in states that do not impose an income tax (for example Florida). You are allowed to deduct either state and local income taxes, or state and local sales taxes. Generally residents of the tri-state region are better off taking the income tax deduction;
Jury pay paid to employer. Some businesses and employers will continue to pay employees’ full salary while they are out of the office serving on juries, but ask that they turn over their jury fees. The IRS requires you to report those fees as taxable income. However, if you give the money to your employer, you can deduct the amount so you aren’t taxed on money that simply passes through your hands.
These are a few deduction and credit opportunities so do your research before filing your return, or consider consulting with a tax professional this filing season.
Tom Cooney and Crystal Faulkner are partners with MCM CPAs & Advisors, a CPA and advisory firm offering expert guidance and beyond the bottom line thinking for today’s public and private businesses large and small, not-for-profits, governmental entities and individuals. For additional information, call 513-768-6796 or visit us online at www.mcmcpa.com.