Before you know it the tax season will be back around again and some of you may even owe some money. Well you can save yourself some money this tax season by making sure you take advantage of all your tax deductions.
A good rule of thumb is to use as many tax breaks you can qualify for. Below are 10 tax deductions you can use the next time you file your taxes to get the most out of your tax return.
1. State sales taxes
You may hear that this tax break expired . . . which it does regularly, only to be reinstated by Congress. For 2013 returns, however, it’s a go.
This is particularly important to you if you live in a state that does not impose a state income tax. You see, Congress offers itemizers the choice between deducting the state income taxes or state sales taxes they paid. You choose whichever gives you the largest deduction. So if your state doesn’t have an income tax, the sales tax write-off is clearly the way to go.
In some cases, even filers who pay state income taxes can come out ahead with the sales tax choice.
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. But the tables aren’t the last word. If you purchased a vehicle, boat, or airplane, you may add the sales tax you paid on that big-ticket item to the amount shown in the IRS table for your state.
2. Reinvested dividends
This isn’t a tax deduction, but it is an important subtraction that can save you a bundle. And former IRS commissioner Fred Goldberg told Kiplinger’s that missing this break is what costs millions of taxpayers a lot in overpaid taxes.
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 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.
If you’re not sure what your basis is, ask the fund for help. (Funds must now report to investors — and the IRS — the tax basis of shares redeemed during the year, but that requirement applies only to shares purchased in 2012 and later years.)
3. Out-of-pocket charitable contributions
It’s hard to overlook the big charitable gifts you made during the year, by check or payroll deduction (check your December pay stub).
But little things add up, too, and you can write off out-of-pocket costs incurred while doing work for a charity. For example, ingredients for casseroles you prepare for a nonprofit organization’s soup kitchen and stamps you buy for a school’s fund-raising mailing count as charitable contributions.
Keep your receipts. If your contribution totals more than $250, you’ll also need an acknowledgement from the charity documenting the support you provided. If you drove your car for charity in 2013, remember to deduct 14 cents per mile, plus parking and tolls paid, in your philanthropic journeys.
4. Student-loan interest paid by Mom and Dad
Generally, you can deduct mortgage or student-loan interest only if you are legally required to repay the debt. But if parents pay back a child’s student loans, the IRS treats the money as if it were given to the 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. And he or she doesn’t have to itemize to use this money-saver. (Mom and Dad can’t claim the interest deduction even though they actually foot the bill because they are not liable for the debt.)
5. Job-hunting costs
If you’re among the millions of unemployed Americans who were looking for a job in 2013, we hope you kept track of your job-search expenses . . . or can reconstruct them. If you’re looking for a position in the same line of work, you can deduct job-hunting costs as miscellaneous expenses if you itemize. Qualifying expenses can be written off even if you didn’t land a new job.
But such expenses can be deducted only to the extent that your total miscellaneous expenses exceed two percent of your adjusted gross income. Job-hunting expenses incurred while looking for your first job don’t qualify. Deductible job-search costs include, but aren’t limited to:
- Transportation expenses incurred as part of the job search, including 56.5 cents a mile for driving your own car plus parking and tolls
- Food and lodging expenses if your search takes you away from home overnight
- Cab fares
- Employment agency fees
- Costs of printing résumés, business cards, postage, and advertising.
Although job-hunting expenses are not deductible when looking for your first job, moving expenses to get to that job are. And you get this write-off even if you don’t itemize.
To qualify for the deduction, your first job must be at least 50 miles away from your old home. If you qualify, you can deduct the cost of getting yourself and your household goods to the new area. If you drove your own car on a 2013 move, deduct 24 cents a mile, plus what you paid for parking and tolls. For a full list of deductible expenses, check out IRS Publication 521.
6. Military reservists’ travel expenses
Members of the National Guard or military reserve may write off the cost of travel to drills or meetings. To qualify, you must travel more than 100 miles from home and be away from home overnight. If you qualify, you can deduct the cost of lodging and half the cost of your meals, plus an allowance for driving your own car to get to and from drills. For 2013 travel, the rate is 56.5 cents a mile, plus what you paid for parking fees and tolls.
7. Deduction of Medicare premiums for the self-employed
Folks who continue to run their own businesses after qualifying for Medicare can deduct the premiums they pay for Medicare Part B and Medicare Part D, plus the cost of supplemental Medicare (medigap) policies. This deduction is available whether or not you itemize and is not subject the 7.5 percent of AGI test that applies to itemized medical expenses.
One caveat: you can’t claim this deduction if you are eligible to be covered under an employer-subsidized health plan offered by either your employer (if you have a job as well as your business) or your spouse’s employer (if he or she has a job that offers family medical coverage).
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. In the 25 percent bracket, each dollar of deductions is worth a quarter; each dollar of credits is worth a greenback.
You can qualify for a tax credit worth between 20 and 35 percent of what you pay for child care while you work. But if your boss offers a child care reimbursement account — which allows you to pay for the child care with pretax dollars — that’s likely to be an even better deal. If you qualify for a 20 percent credit but are in the 25 percent tax bracket, for example, the reimbursement plan is the way to go. (In any case, only amounts paid for the care of children younger than age 13 count.)
You can’t double dip. Expenses paid through a plan can’t also be used to generate the tax credit. But get this: although only $5,000 in expenses can be paid through a tax-favored reimbursement account, up to $6,000 for the care of two or more children can qualify for the credit. So if you run the maximum through a plan at work but spend even more for work-related child care, you can claim the credit on as much as $1,000 of additional expenses. 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 assets you received. Let’s say you inherited a $100,000 IRA, and the fact that the money was included in your benefactor’s estate added $40,000 to the estate-tax bill.
You get to deduct that $40,000 on your tax returns as you withdraw the money from the IRA. If you withdraw $50,000 in one year, for example, you get to claim a $20,000 itemized deduction on Schedule A. That would save you $5,600 in the 28 percent bracket.
10. State tax paid last Spring
Did you owe tax when you filed your 2012 state income tax return in the Spring of 2013? Then for goodness’s sake, remember to include that amount in your state-tax deduction on your 2013 federal return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments during the year.