There are three ways to lower your taxes: Make less, cheat, or take all the tax breaks you're eligible for. The first two aren't good ideas, but we can help with the third. Check out this list of commonly overlooked deductions.
Americans love tax breaks.
A January study by the National Association of Home Builders [PDF] found a majority of homeowners would rather keep certain tax deductions – for charitable giving, mortgage interest, and local income tax – than lower their overall tax rate.
But those are just a few of the better-known tax breaks. In the video below, Money Talks News founder and CPA Stacy Johnson highlights some of the easily overlooked deductions and credits people miss all the time. Check it out, and then read on for more.
Stacy just cited five tax breaks you don’t want to forget. Here’s a recap with a few more, and links for details…
You can deduct the value of any cash or property donations to a legitimate charity, although you’ll need a receipt if you get audited. Volunteers can’t deduct for time, but they can get 14 cents per mile traveled to and from charity work, plus out-of-pocket expenses from that work, including supplies and required uniforms. For more details, check out the IRS page on charitable contribution deductions.
2. Child care
The Child and Dependent Care Credit helps cover the cost of daycare (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) and even housekeeping.
Retirement contributions often qualify for a deduction (which reduces your income) but they can also net you a credit (which directly reduces what you owe) if you make under $27,750 a year. It’s called the Retirement Savings Contribution Credit or Savers Credit, and it can save you up to 50 percent of the first $2,000 put toward an IRA (including Roth) or work plan.
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 51 cents per mile through June, 55.5 cents after) and so on. But there are catches: It has to be for work in the same field, and it’s only for those who itemize. That means it won’t help unless these expenses total more than 2 percent of your adjusted gross income. But this falls under miscellaneous deductions, and not all of them have the 2 percent rule, so skim through the list for other ideas.
Knowledge is power and lower taxes. There are two education credits and three deductions – but you can’t get them all.
The American Opportunity tax credit may be the best option at up to $2,500 because it is partially refundable – meaning that you can get more money back than you paid in. But it’s only available for the first four years spent on an undergraduate degree. If you can’t claim that, there’s the Lifetime Learning Credit of up to $2,000, which is available for as many years as you qualify and includes graduate classes and any job training courses.
Then, the deductions: You can deduct student loan interest up to $2,500. There is also a straight tuition and fees deduction of up to $4,000, but it’s subject to that pesky over-2-percent-of-adjusted-gross requirement and you can’t claim the same expenses used for an education credit. Bonus deduction for grade school teachers: Up to $250 on school supplies and books.
For the details on all of these, check out Publication 970.
6. Military service.
If you’re in the reserves and traveled over 100 miles last year for training or other duties, you can deduct hotel stays, half your meal costs, and travel fees (parking, tolls, mileage). No need to itemize. The IRS has other tax tips for servicemen and women too – for instance, pay from any month you spent in a combat zone is not taxable.
7. Medical expenses
Many people pass up health care costs at tax time, but do the math if you had big bills last year – expenses totaling more than 7.5 percent of your adjusted gross income will reduce your taxable income, and 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
There are two credits for people who made energy-efficient home improvements in 2011, although one of them has shrunk a lot in the past few years and may only be worthwhile if you haven’t taken it before – it now has a lifetime limit of $500. That’s the Nonbusiness Energy Property Credit, and it lets you deduct 10 percent of the cost of qualified improvements, stuff like insulation and windows. If the IRS considers the improvement “residential property” – a new AC unit or water heater – you can include labor costs in that calculation.
But going green is the real way to keep your green. The Residential Energy Efficient Property Credit has no cap, includes labor, and is worth 30 percent of the cost on qualifying solar panels, solar heaters, and geothermal heaters.
Want more ways to save on taxes? Follow our ongoing series on tax hacks, and check out these two other stories on complicated deductions: Tax Hacks 2012 – Home Office Deductions and 8 Tips to Turn Your Vacation Into a Tax Deduction.