It’s easy to overlook some of the many great opportunities for federal income tax deductions. But by doing so, you’re leaving money on the table that could instead be going back in your pocket.
It’s true, the IRS will occasionally correct your mistakes and reward you the deductions you may have missed. But you definitely shouldn’t count on such circumstances. Ultimately it’s up to you to do your own due diligence.
As a reminder, here are a few potential tax breaks that people often miss. It’s wise idea to also ask a tax professional to help you think of more possible deductions, as this is by no means a complete list.
1. Job search expenses. If you started a new job in a similar industry last year, you can deduct your job search costs as miscellaneous expenses. Remember those deductions can’t surpass 2% of your adjusted gross income, however.
If you didn’t get hired in a new position, you can still write off qualified job search expenses, such as overnight lodging, mileage, cab fares, resume printing, etc. If you didn’t keep track of such expenses, a tax professional can help you estimate them.
Also, if your new job prompted you to relocate 50 or more miles from your previous residence last year, you can write off job-related moving expenses.
2. Home office expenses. Do you work from home? Even if it’s a part-time endeavor such as consulting or freelancing, there are deductions available. First, figure out what percentage of the square footage in your house is used for work-related activities. (Bathrooms and other “break areas” can count in the calculation).
For example, if you use approximately 15% of your home’s square footage for business purposes, then 15% of your homeowners insurance, home maintenance costs, utility bills, property tax and mortgage/rent may be deducted.
3. State sales taxes. If you live in a state that collects no income tax from its residents, you have the option to deduct state sales taxes paid the previous year.
4. Student loan interest. If you have been making student loan payments on behalf of a child and don’t claim him or her as a dependent, that child may be qualified to write off up to $2,500 of student-loan interest. Itemizing the deduction isn’t required.
5. Education and training expenses. If you participated in classes, programs or courses related to your career last year, you may be able to take a tax deduction for out-pocket costs. If the education and training you received added value to your business or increased your ability to become employed, you may deduct any tuition costs, as well as related textbook and travel expenses.
6. Charitable contributions. Now is the time to dig out receipts for charitable donations you’ve made throughout the year. Or, if you forgot to keep a paper trail, contact the organizations to which you’ve contributed and request a copy of the amount you gave last year. You can fully deduct these expenses, as long as it’s a qualified charity. You can also write off expenses incurred during the course of your charitable work. This means the mileage you accumulated to travel to a volunteer location ($.14 per mile, plus tolls and parking fees).
7. Armed forces reserve travel expenses. If you are a reservist or a member of the National Guard, traveled more than 100 miles from home and spent one or more nights away from home to drill or attend meetings, you are qualified to deduct 100% of related lodging costs and 50% of meal costs. You may also write off mileage ($0.56 per mile plus tolls and parking fees).
8. Estate tax on inherited income. Have you inherited a deceased loved one’s IRA account in the last year? If the estate of the original IRA owner was large enough to be subject to federal estate tax, you have the option to claim a federal income tax write-off for the amount you paid.
For example, if you inherited a $100,000 IRA that was part of the original IRA owner’s taxable estate and were therefore required to pay $40,000 in death taxes, you can deduct that amount on your taxes. Check with your CPA for details.
9. The child care credit. If you paid for child care while you worked last year, you can qualify for a tax credit worth 20-35% of that amount. (The child, or children, must be no older than 12). Note that tax credits are superior to tax deductions, as they cut your tax bill dollar-for-dollar.
10. Reinvested investment fund dividends. If you have a mutual fund and regularly use your earnings from that account to purchase other shares, remember that this substantially increases your tax basis in the fund.
If you do forget to include the reinvested dividends in your basis, you may be hit with double the taxes. It’s important to remember that as your basis in the fund grows, the taxable capital gain when you withdraw shares will be reduced (or, if the fund is losing money, your tax-saving loss is increased). But sure to check with your tax professional before claiming the above deductions, as he or she can help you with the specifics according to your situation.
Don’t hesitate to ask your tax professional plenty of questions about what other deductions you may be eligible for depending on your personal situation. Remember, the more you write off, the more money ends up back in your wallet instead of being paid to Uncle Sam.