Every year millions of taxpayers overpay their income taxes because they didn’t take deductions they were legally allowed to claim. Here is a list of the most commonly missed tax deductions. Use it as a checklist to ensure you pay the lowest tax liability allowed by law.
1) The biggest one is state sales tax. This is particularly important in states that do not have income taxes, such as Texas and Florida. People just forget about it. Most programs now include this, so if you’re using a program to do your taxes, you’re probably going to get the basic sales tax deduction.
2) Reinvested dividends is a big one. If you own stocks or mutual funds, you’re probably getting taxed on your dividends as they are paid out. But you seldom take the money out. I’d say 90 to 95 percent of people actually just reinvest it to let it compound and grow. Let’s say someone has a stock that they sell for $1,000. It originally cost them $200, and they held it forever. So over the years, they were taxed on $300 worth of dividends that they reinvested. Out of the $1,000 in stocks they sold, $200 represents the original purchase; $300 represents the reinvested amount. Quite often, taxpayers overlook this.
3) Expenses related to charitable work. If you volunteer at your church or a charity, you may deduct expenses and mileage related to those activities. As an example, if you bring food for a church dinner, you can deduct the cost of the food you buy and the mileage related to buying and delivering the food. Remember to keep your receipts. Like everything else, if it isn’t written down, it didn’t happen. Keep a receipts, and keep a log of your mileage.
4) Student loan interest paid by mom and dad. Normally you can’t deduct expenses you didn’t pay yourself, but there are a couple of exceptions, and this is one of them. If the parents pay the student loan and they can’t claim the child as a dependent, the IRS treats it as if the parent made a gift to the child and the child paid the loan. Now the child can deduct up to $2,500 in student loan interest on their own return.
5) Job hunting costs. If you’re looking for a new position in the same line of work, be sure to keep track of your expenses. You can only deduct them if you itemize, so if you don’t have a house or pay big state income taxes, you’re probably not going to take advantage of this. Remember, it’s only about 2 percent. Job hunting costs for your first job out of college are not deductible, but the related moving expenses are. To qualify, you must have moved 50 miles away from your old home. You can deduct the cost of moving yourself and your household goods to a new location. If you drive, don’t forget to take the mileage. You get this deduction whether you itemize or not, because it is what’s considered an item before adjusted gross income. It’s not as good as it used to be, and it can get complicated if you have reimbursements from your employer.
6) Military reserve travel expenses. If you’re a reservist and you have to travel more than 100 miles for drills and meetings, you get this deduction whether you itemize or not.
7) Reduce self-employment tax with the health insurance deduction. If you use a tax program or tax preparer, this is almost automatic, but I’ve seen handwritten, self-prepared returns where this is missed. Make sure you take this into account.
8) Childcare credit by a reimbursement account. This includes Section 125 plans and flex accounts. Essentially I put some money aside from every paycheck which reduces my taxable income. I’m going to pay less tax now, and the money I put aside is used to pay for childcare.
9) State taxes paid with your previous year’s return. It’s very easy to forget about this. Most tax programs will check this for you. You can deduct the amount you paid on your W-2. If you change tax preparers, make sure you bring a copy of last year’s state return, because it’s very easy to overlook the amount that you owed with the return.
10) Points paid when you purchase a house. This is often missed because mortgage companies hate to call them points. Why? Because people hate to pay points! So they call them just about everything else—loan origination fees, loan discounts, discount points. Don’t forget about home improvement loan points, either. Points paid on a loan to improve your principal residence are fully deducted in the year that you paid them.
Here’s one very commonly missed. Points paid by the seller are treated as if paid by the buyer as long as you have funds that have not been borrowed. In English: You must have made a down payment more than the amount of the points in order to deduct them. You’ve got to look at the HUD-1 when you purchase the house. Look at the settlement fees and look over on the seller’s side, which most of us ignore, and see if there were any points that were paid. If you had enough of a down payment, more than the points, you get to deduct them. Unusual, but nice. It’s in the law, so take advantage of it.
11) Refinancing points. Points paid to refinance your home are not deducted in the year of the refinance; instead, they were amortized over the life of the loan. It doesn’t come out to much. If you have a 20 year loan, you pay $2,000—I’m basically going to deduct $100 a year. It’s not a lot, but it’s often missed, especially when interest rates were dropping. It was very common to see people refinancing a second or even a third time. What happens is once I refinance again or sell the house, any points that were not yet written off can be written off at the time either one of those events happens. This is very commonly forgotten. If I’ve done your tax return every year, my program allows me to carry it over. So the chance of it getting missed is if you’re doing your own return or if you switch CPAs. Make sure they put these carryovers in.
12) Section 179 deduction or bonus depreciation on business equipment. Equipment normally must be depreciated over the useful life of the equipment as set up by the IRS. Computer equipment is five years. Most businesses can deduct 100 percent of it their first year under Section 179. In 2013, the amount you can deduct went back up to $500,000. I’ve only got one or two clients who buy enough equipment to be beyond that.
13) Travel and auto expenses related to medical care for yourself and your dependents. You can use actual expenses and the standard mileage rate provided by the IRS every year.
14) Sales taxes paid on large purchases. Right now if you itemize, what you get is a table amount based on your income and the number of people in your household. You can add up all of your sales tax from receipts, if you happen to keep them all. I’ve had a few people do that over the years, but I’ve never seen one where the table amount was not larger. But what’s often forgotten is if you buy something large, you get to add that to the table amount. The code actually mentions cars, boats, motor homes, airplanes, large home improvements, and furniture.
15) Work-related education costs. To be deductible, the courses must be specifically required by your employer, by law, by government regulations, or to maintain or improve skills required to perform your present job. The first ones are obvious; the last one is large enough to drive a truck through if you can just document your expenses. As a CPA, I am required to take 40 hours of CPE every year, so I meet the government regulations. I might hire a CPA and say, “That’s great, but I expect you to do another 20 in tax law and another 20 in QuickBooks.” I as the employer am now requiring them to do something extra to keep their job.
But what if I have somebody here who wants to learn something that they feel would be useful, that they see as necessary to maintain or to improve the skills I expect them to have to perform their job? Then they get the deduction. If somebody decides on their own that they’re going to go out and buy some QuickBooks courses and take them because they think it will help them do their job better, that’s good enough, as long as you can reasonably make a relationship between the job and the course you took.