Commonly Overlooked Deductions

Commonly Overlooked Deductions

Everyone feels the sting of abandonment when they watch so much of their money walking away in taxes. The key to reducing the amount of your income that is taxable lies in knowing what tax deductions you qualify for. Many deductions are easy to overlook, and nobody from the IRS is going to come knocking on your door to tell you about them. However, TaxCut or your H&R Block tax preparer are well informed and can help you make sure that you are utilizing all of the deductions that apply to your particular situation.

Commonly Overlooked Itemized Deductions:

It is always a good idea to track your itemized deductions every year, even if you have always previously just taken the standard deduction. It's entirely possible that your itemized deductions are more than the standard deduction, and so you've been paying more tax than you actually know. Also, every tax year is different, and this may be the year that itemizing your deductions can save you money.

Vehicle Excise Tax. If your state or local government sends you an annual bill charging your for the tax on owning a vehicle, it could be deductible. It might also be deductible if you are leasing a vehicle and you are billed for the tax for it by your finance company. These types of taxes are deductible if they are dependant on the value of your vehicle. It's definitely worth checking to see how the tax was calculated. If you're not sure, you can always ask your local tax authority.

Job-Hunting Expenses. One of the fabulous hidden perks of being temporarily unemployed is that not all of the cash-outflow required to find a new job is a loss. If you are finding a new job in the same line of work, the expenses incurred in job-hunting are frequently deductible as a miscellaneous itemized expense. So make sure you save your receipts for things like phone bills, resume advice and travel expenses. However, this does only apply if you are remaining within the same field of work, not switching careers.

Real Estate Taxes. All taxes that you pay on real estate are deductible. Also, make sure you are not overlooking taxes that you pay indirectly, like those paid through a mortgage escrow account. If you have purchased a home in the current tax year, you may have reimbursed the seller for some portion of taxes at closing. Check your settlement statement carefully to see if this applies to you, as those taxes are also deductible.

Cost of Tax Preparation. It doesn't hurt you to use the best tax preparation you can find for your particular needs. Tax software expenses, tax preparation fees and other tax preparation and/or filing expenses are all deductible as a miscellaneous itemized expense. You do need to make sure you are deducting them in the income tax return for the same tax year in which you made the financial outlay. For example, the cost of preparing and filing your 2010 tax returns would be deducted on your 2011 tax return (assuming you also paid for it in 2011 when you were preparing the 2010 taxes.)

Estate Tax on Income in Respect of a Decedent. This confusing jargon means that if you, as a descendant of rich Uncle Ned, are getting money from something like an inherited IRA, you have to include that IRA distribution in your income. And you get taxed on it. However, if the estate of the person who died (Uncle Ned) was large enough to trigger an estate tax, definitely ask the executor to tell you the amount of the tax that is attributable to the IRA distribution. This federal estate tax amount is tax-deductable. Obviously, if the estate didn't get taxed by a federal estate tax-i.e. Granny Sue left each of her grandkids a cat and $100-you don't get any deductions. However, Granny Sue's cat legacy isn't income in respect of a decedent, so you don't have to include it as additional income, because it was left to you by gift or inheritance. (And Granny already paid taxes on it).

Commonly Overlooked Deductions From Last Year's Return.

Always have the federal and state tax returns from the prior year readily available when preparing your current taxes. If you know where to look, there are a number of items that can save you money.

Capital Loss Carryover. If don't have to pay tax on your capital gains if your capital losses are more than your capital gains. You can also deduct up to $3,000 ($1,500 if married filing separately) of the capital loss on the next year's return. Any losses beyond this cutoff are referred to as a capital loss carryover, and on the next year's tax return are treated as capital loss. This is especially helpful if you have capital loss one year and capital gain the next, as you can reduce your taxes in the later year by using the capital loss carryover.

State Tax Paid With Your Return In April. It's easy to forget about an April state income tax payment when you are doing your taxes for the next year. If you owed taxes when you filed your 2010 return, all that money is not lost! State income taxes are deductible in the year they are paid.

Two More Deductions Not to Miss:

Reinvested Dividends.A mutual fund account is frequently structured to reinvest dividends in additional share purchases. When you sell stock that was purchased this way, your basis-the amount you subtract from the sale prices to calculate your gain or loss-should include these reinvested dividends. Unless your fund does it for you, it's up to you to keep track of these.

Credit for Excess Social Security Tax. If you have worked for more than one employer during the tax year, this is definitely worth looking into. You can get a credit for paying excess Social Security tax, which definitely could have happened since each employer you worked for will withhold Social Security tax as if you didn't work for anyone else. Once your wages have reached the Social Security limit, ($102,000 in 2010), anything the government has taken beyond that for Social Security will act as a credit toward the regular tax you owe for the year.

Article written by: Letty G.

Back to Articles =>