- 6 Best Ways to Ensure You’ll Have Enough Money in Retirement
- Your Early Holiday Present: Gas at $3 a Gallon or Less
- Nearly Half of US Workers Don’t Have a Work-Based Retirement Plan
- Lotteries Are Losing Their Allure With Some Customers
- Pop Quiz: Can You Profit When Stocks Fall?
- Cold Is Coming: 10 Ways to Winterproof Right Now
- Government Sues AT&T for Allegedly ‘Throttling’ Unlimited Data Customers
- Monthly Bills That Can’t Help Your Credit, But Can Hurt It
Americans love tax breaks.
Everybody knows they can deduct mortgage interest, medical expenses over a certain amount, gifts to charity — even the cost of preparing your tax return.
But those are just a few of the better-known tax breaks. For the video below, I used a metal detector at the beach in an attempt to show how finding hidden tax deductions is like uncovering buried treasure. Check it out, then read on for more.
In that video, I showed five potential and commonly missed deductions. Here’s a recap, along with five more.
You can deduct the value of any cash or property donations to a legitimate charity, although you’ll need receipts.
That’s common knowledge, but here’s something that isn’t: Volunteers can deduct 14 cents per mile traveled to and from charity work, plus out-of-pocket expenses from that work, including supplies and required uniforms. (Your time isn’t deductible.)
For more details, check out Publication 526, the IRS Guide to Charitable Contributions.
2. Child care
The Child and Dependent Care Credit helps cover the cost of day care (20 to 35 percent, depending on income), but many people aren’t aware it also extends to the cost of summer day camps (but not overnight-stay camps), adult dependent care and even housekeeping. Restrictions apply, but it’s worth checking out. For this one, you’ll want to look to IRS Publication 503.
And remember, a credit is worth a lot more than a deduction, because a credit reduces your taxes dollar for dollar, whereas a deduction only reduces the income you’re taxed on. For example, if you’re in the 25 percent tax bracket, a dollar of deduction reduces your tax by 25 cents. But a dollar of credit reduces your taxes by a full dollar.
Retirement contributions often qualify for a deduction (which reduces your taxable income) but they can also net you a credit if you make under $27,750 a year for single taxpayers and $55,500 for joint filers.
It’s called the Retirement Savings Contribution Credit or Savers Credit, and if you made contributions to an IRA, 401(k) or other qualified retirement plan, you may be eligible for a credit of up to $1,000 single or $2,000 joint. The less income you make, the bigger the credit.
4. Job hunting
If you’ve moved at least 50 miles for a job, you may be able to deduct moving expenses. But if you’re actively seeking work, many other costs are deductible, too – employment agency fees, resume preparation, business cards, travel (at 56.5 cents per mile) and other expenses.
But there are catches. It has to be for work in the same field, and it’s only for those who itemize. To see what you can qualify for, you can check Publication 521. But a quick way to determine if your moving expenses will be deductible is to use this IRS worksheet.
Knowledge is power and lower taxes.
The American Opportunity Credit is the best way to lower taxes because it’s partially refundable, meaning you can theoretically get more money back than you paid in. You’ll get the credit for the full amount of the first $2,000 spent on qualifying college expenses and 25 percent of the next $2,000, so the max is $2,500.
Income limits apply. It starts phasing out for single taxpayers with a modified adjusted gross income of more than $80,000, $160,000 for joint filers.
The American Opportunity Credit is only available for the first four years of college. If you go beyond that, look to the Lifetime Learning Credit. It’s up to $2,000 — 20 percent of the first $10,000 in qualifying expenses — and is available for as many years as you qualify. It also includes graduate classes and job training courses.
Income limits apply to this one as well. For 2013, the credit starts phasing out for single taxpayers with more than $53,000 of modified adjusted gross income, and joint filers with $107,000 of MAGI.
Make too much to qualify for either credit? You can still deduct qualified expenses under the Tuition and Fees Deduction. It can reduce your taxes by up to $4,000.
Read about all the education credits and deductions here. But remember, you can’t take them all, just the one that will give you the biggest write-off.
6. Military service
If you’re in the Reserves and traveled more than 100 miles last year for training or other duties, you can deduct hotel stays, half your meal costs, and travel expenses (parking, tolls, mileage at 56.5 cents per mile). No need to itemize.
The IRS has other tax tips for service members – for instance, pay from any month you spent in a combat zone is not taxable.
7. Medical expenses
Because of income limitations, medical expenses are tough to deduct. But do the math if you had big bills last year. Expenses totaling more than 10 percent of your adjusted gross income (7.5 percent if you were born before 1949) will reduce your taxable income.
There are a lot of qualifying medical expenses to include, like insurance premiums (including what you pay into an employer plan) and travel to and from treatments.
The self-employed can deduct their whole insurance premium as long as they made a net profit for the year and aren’t covered by another employer (including through your spouse).
8. Energy efficiency
For several years now, there have been some juicy credits for installing qualifying energy savers, like new windows and insulation. But it looks like tax year 2013 will be the last year.
You get a credit of 10 percent of the cost of certain energy-saving improvements for 2013, but it has a lifetime limit of $500, and only $200 of that can be for windows. Read more at this page of the IRS site.
There’s still one great credit left, however. If you installed something that uses alternative energy, like a solar water heater, geothermal heat pump or wind turbines, you can get a credit of up to 30 percent of the cost. That’s good until 2016.
9. Baggage fees
If you’re self-employed and travel for business, you know that your travel expenses are deductible. But if you got nailed for a baggage fee at the ticket counter last year, that’s deductible too.
10. State sales taxes
You may have heard that the deduction for state sales taxes was slated to expire. It was, but was reinstated.
You’re allowed to deduct either state sales taxes or state income taxes, whichever helps most. If you’re lucky enough to live in a state without state income taxes, easy decision: Deduct your sales taxes. But even if you do pay state income tax, you should still compare, especially if you bought a big-ticket item last year, like a car.
The IRS has a handy calculator to see how much you can deduct.
Know something we missed? Your fellow readers would love to hear about it. Post a comment below or on our Facebook page.