Every year, the IRS dutifully reports the most common blunders
that taxpayers make on their returns. And every year, at or near
the top of the "oops" list is forgetting to enter their Social
Security number at the top of the tax form -- or making a mistake
when entering those nine digits.
But think about it for a minute: Do you really think that's the
most common mistake ... or simply the easiest to notice?
One thing we know for sure is that the opportunity to make
mistakes is almost unlimited, and missed deductions can be the most
costly. About 45 million of us itemize on our 1040s -- claiming
more than $1 trillion worth of deductions. That's right:
$1,000,000,000,000, a number rarely spoken out loud until Congress
started tying itself up in knots trying to deal with the budget
deficit and national debt.
Another 92 million taxpayers claim about $700 billion worth
using standard deductions -- and some of you who take the easy way
out probably shortchange yourselves. (If you turned 65 in 2012,
remember that you now deserve a bigger standard deduction than when
you were younger.)
Yes, friends, tax time is a dangerous time. It's all too easy to
miss a trick and pay too much. Years ago, the fellow who ran the
IRS at the time told Kiplinger's Personal Finance magazine that he
figured millions of taxpayers overpay their taxes every year by
overlooking just one of the money-savers listed below.
State sales taxes
This is an especially dangerous issue for 2012 returns because,
throughout 2012, this tax deduction simply didn't exist. The right
for taxpayers to deduct state sales taxes paid expired at the end
of 2011. Everyone expected Congress to revive the tax break
sometime during 2012, but the issue got tangled up in fiscal cliff
negotiations. Finally, in the bill approved January 1, 2013, the
deduction was restored ... retroactively for 2012 and for 2013
returns that will be filed next year.
This is particularly important to you if you live in a state
that does not impose a state income tax. You see, Congress offers
you the choice between deducting state income taxes paid or state
sales taxes paid. You choose whichever gives you the largest
deduction, of course, and if your state doesn't have an income tax,
the sales tax write-off is clearly the way to go.
In some cases, even filers who pay state income taxes can come
out ahead with the sales tax choice.
The IRS has tables that show how much residents of various
states can deduct, based on their income and state and local sales
tax rates. But the tables aren't the last word. If you purchased a
vehicle, boat or airplane, you may add the sales tax you paid on
that big-ticket item to the amount shown in the IRS table for your
state.
The same goes for any homebuilding materials you purchased.
These add-on items are easy to overlook, but could make the
sales-tax deduction a better deal even if you live in a state with
an income tax. The IRS has a
calculator
on its Web site
to help you figure the deduction. (As this is written, the IRS is
working to update the calculator for 2012 returns.)
Reinvested dividends
This isn't really a tax deduction, but it is an important
subtraction that can save you a bundle. And this is the break that
former IRS commissioner Fred Goldberg told Kiplinger's that a lot
of taxpayers miss.
If, like most investors, your mutual fund dividends are
automatically used to buy extra shares, remember that each
reinvestment increases your tax basis in the fund. That, in turn,
reduces the taxable capital gain (or increases the tax-saving loss)
when you redeem shares. Forgetting to include the reinvested
dividends in your basis results in double taxation of the dividends
-- once when they were paid out and immediately reinvested in more
shares and later when they're included in the proceeds of the sale.
Don't make that costly mistake.
If you're not sure what your basis is, ask the fund for help.
(Starting with sales in 2012, mutual funds must report to investors
-- and the IRS -- the tax basis of shares redeemed during the year.
But note this: The new rule applies only to shares purchased in
2012 and later years. If you redeemed shares you purchased prior to
2012, it's still up to you to figure your basis. Don't forget those
reinvested dividends!)
Out-of-pocket charitable contributions
It's hard to overlook the big charitable gifts you made during
the year, by check or payroll deduction (check your December pay
stub).
But the little things add up, too, and you can write off
out-of-pocket costs incurred while doing work for a charity. For
example, ingredients for casseroles you prepare for a nonprofit
organization's soup kitchen and stamps you buy for your school's
fundraising mailing count as a charitable contribution. Keep your
receipts and if your contribution totals more than $250, you'll
need an acknowledgement from the charity documenting the support
you provided. If you drove your car for charity in 2012, remember
to deduct 14 cents per mile plus parking and tolls paid in your
philanthropic journeys.
Student-loan interest paid by Mom and Dad
Generally, you can only deduct mortgage or student-loan interest
if you are legally required to repay the debt. But if parents pay
back a child's student loans, the IRS treats the money as if it was
given to the child, who then paid the debt. So, a child who's not
claimed as a dependent can qualify to deduct up to $2,500 of
student-loan interest paid by Mom and Dad. And he or she doesn't
have to itemize to use this money-saver. Mom and Dad can't claim
the interest deduction even though they actually foot the bill
since they are not liable for the debt.
Job-hunting costs
If you're among the millions of unemployed Americans who were
looking for a job in 2012, we hope you kept track of your
job-search expenses ... or can reconstruct them. If you're looking
for a position in the same line of work, you can deduct job-hunting
costs as miscellaneous expenses if you itemize. Qualifying expenses
can be written off even if you didn't land a new job. In any case,
such expenses can be deducted only to the extent that your total
miscellaneous expenses exceed 2% of your adjusted gross income.
Job-hunting expenses incurred while looking for your first job
don't qualify. Deductible job-search costs include, but aren't
limited to:
-- Transportation expenses incurred as part of the job search,
including 55.5 cents a mile for driving your own car plus parking
and tolls -- Food and lodging expenses if your search takes you
away from home overnight -- Cab fares -- Employment agency fees --
Costs of printing resumes, business cards, postage, and
advertising
The cost of moving for your first job
Although job-hunting expenses are not deductible when looking
for your first job, moving expenses to get to that job are. And you
get this write-off even if you don't itemize.
To qualify for the deduction, your first job must be at least 50
miles away from your old home. If you qualify, you can deduct the
cost of getting yourself and your household goods to the new area.
If you drove your own car on a 2012 move, deduct 23 cents a mile,
plus what you paid for parking and tolls.
Military reservists' travel expenses
Members of the National Guard or military reserve may tap a
deduction for travel expenses to drills or meetings. To qualify,
you must travel more than 100 miles from home and be away from home
overnight. If you qualify, you can deduct the cost of lodging and
half the cost of your meals, plus an allowance for driving your own
car to get to and from drills. For 2012 travel, the rate is 55.5
cents a mile, plus what you paid for parking fees and tolls.
Deduction of Medicare premiums for the self-employed
Folks who continue to run their own businesses after qualifying
for Medicare can deduct the premiums they pay for Medicare Part B
and Medicare Part D and the cost of supplemental Medicare (medigap)
policies. This deduction is available whether or not you itemize
and is not subject the 7.5% of AGI test that applies to itemized
medical expenses. One caveat: You can't claim this deduction if you
are eligible to be covered under an employer-subsidized health plan
offered by your employer (if you have a job as well as your
business) or your spouse's employer if he or she has a job that
offers family medical coverage.
Child-care credit
A credit is so much better than a deduction; it reduces your tax
bill dollar for dollar. So missing one is even more painful than
missing a deduction that simply reduces the amount of income that's
subject to tax. In the 25% bracket, each dollar of deductions is
worth a quarter; each dollar of credits is worth a greenback.
You can qualify for a tax credit worth between 20% and 35% of
what you pay for child care while you work. But if your boss offers
a child care reimbursement account -- which allows you to pay for
the child care with pre-tax dollars -- that might be an even better
deal. If you qualify for a 20% credit but are in the 25% tax
bracket, for example, the reimbursement plan is the way to go. (In
any case, only amounts paid for the care of children under age 13
count.)
You can't double dip. Expenses paid through a plan can't also be
used to generate the tax credit. But get this: Although only $5,000
in expenses can be paid through a tax-favored reimbursement
account, up to $6,000 for the care of two or more children can
qualify for the credit. So, if you run the maximum through a plan
at work but spend even more for work-related child care, you can
claim the credit on as much as $1,000 of additional expenses. That
would cut your tax bill by at least $200.
Estate tax on income in respect of a decedent
This sounds complicated, but it can save you a lot of money if
you inherited an IRA from someone whose estate was big enough to be
subject to the federal estate tax. Basically, you get an income-tax
deduction for the amount of estate tax paid on the IRA assets you
received. Let's say you inherited a $100,000 IRA, and the fact that
the money was included in your benefactor's estate added $35,000 to
the estate-tax bill. You get to deduct that $35,000 on your tax
returns as you withdraw the money from the IRA. If you withdraw
$50,000 in one year, for example, you get to claim a $17,500
itemized deduction on Schedule A. That would save you $4,900 in the
28% bracket.
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State tax paid last spring
Did you owe tax when you filed your 2011 state income tax return
in the spring of 2012? Then, for goodness' sake, remember to
include that amount in your state-tax deduction on your 2012
federal return, along with state income taxes withheld from your
paychecks or paid via quarterly estimated payments.
Refinancing points
When you buy a house, you get to deduct in one fell swoop the
points paid to get your mortgage. When you refinance, though, you
have to deduct the points on the new loan over the life of that
loan. That means you can deduct 1/30th of the points a year if it's
a 30-year mortgage. That's $33 a year for each $1,000 of points you
paid -- not much, maybe, but don't throw it away.
Even more important, in the year you pay off the loan -- because
you sell the house or refinance again -- you get to deduct all
as-yet-undeducted points. There's one exception to this sweet rule:
If you refinance a refinanced loan with the same lender, you add
the points paid on the latest deal to the leftovers from the
previous refinancing -- and deduct that amount gradually over the
life of the new loan. A pain? Yes, but at least you'll be
compensated for the hassle.
Jury pay turned over to your employer
Many employers continue to pay employees' full salary while they
serve on jury duty, and some impose a quid pro quo: the employees
have to turn over their jury pay to the company coffers. The only
problem is that the IRS demands that you report those jury fees as
taxable income. To even things out, you get to deduct the amount
you give to your employer.
But how do you do it? There's no line on the Form 1040 labeled
jury fees. Instead the write-off goes on line 36, which purports to
be for simply totaling up deductions that get their own lines. Add
your jury fees to the total of your other write-offs and write
"jury pay" on the dotted line.
American Opportunity Credit
Unlike the Hope Credit that this one has temporarily replaced,
the American Opportunity Credit is good for all four years of
college, not just the first two. Don't shortchange yourself by
missing this critical difference. This tax credit is based on 100%
of the first $2,000 spent on qualifying college expenses and 25% of
the next $2,000 ... for a maximum annual credit per student of
$2,500. The full credit is available to individuals whose modified
adjusted gross income is $80,000 or less ($160,000 or less for
married couples filing a joint return). The credit is phased out
for taxpayers with incomes above those levels. If the credit
exceeds your tax liability, it can trigger a refund. (Most credits
can reduce your tax to $0, but not get you a check from the
IRS.)
Deduct those blasted baggage fees
In recent years airlines have been driving passengers batty with
extra fees for baggage and for making changes in travel plans. All
together, such fees add up to billions of dollars each year. If you
get burned, maybe Uncle Sam will help ease the pain. If you're
self-employed and travelling on business, be sure to add those cost
to your deductible travel expenses.
Credits for energy-saving home improvements
It's widely believed that tax credits for energy saving home
improvement have expired. And that's true for the credits that
encouraged homeowners to replace windows and doors, add insulation
and upgrade air conditioning and furnace systems to more
energy-efficient units. But the most valuable credits still exist
... and will through 2016. These credits effectively refund 30% of
the cost (including labor) of installing l qualified residential
alternative energy equipment, such as solar hot water heaters,
geothermal heat pumps and wind turbines. If you installed such a
system in 2012, be sure to let Uncle Sam lend you a hand with the
cost.
Additional bonus depreciation
A break that allowed business owners -- including those who run
businesses out of their homes -- to write off 100% of the cost of
qualified assets placed in service expired at the end of 2011.
Although Congress did not extend this break retroactively as part
of the fiscal cliff deal, bonus deprecation didn't disappear
completely � it's available at the 50% level for
qualified assets purchased in 2012.
Perhaps more valuable is a break Congress did make retroactive
for 2012 purchases. The lawmakers restored a supercharged
"expensing" provision -- which basically lets you write off the
full cost of new assets in the year you put them into service.
While the dollar limit for expensing had fallen to $139,000 worth
of assets for 2012, the fiscal cliff deal boosted the cap to
$500,000. Note that the right to use expensing phases out if you
put more than $2 million worth of assets into service in 2012
Break on the sale of demutualized stock
The year 2012 brought another court victory for taxpayers
battling the IRS over the issue of demutualized stock. That's stock
that a life insurance policyholder receives when the insurer
switches from being a mutual company owned by policyholders to a
stock company owned by stockholders. The IRS's longstanding
position is that such stock had no tax basis, so that when the
shares were sold, the taxpayer owed tax on 100% of the proceeds of
the sale. But after a long legal struggle, a federal court ruled in
2009 that the IRS was wrong. And this year, a federal district
court sided with taxpayers, too. The courts haven't said what the
basis of the stock should be, but many experts think it's whatever
the shares were worth when they were distributed to policyholders.
If you sold stock in 2012 that you received in a demutualization,
be sure to claim a basis to hold down your tax bill.
Tax-free transit subsidy
The fiscal cliff deal signed by President Obama's autopen on
January 2 brought a retroactive break for commuters who use public
transit to get to work in 2012. Last year, folks who drove to work
could receive up to $240 tax-free from their employers to cover the
cost of parking. But, due to a glitch in the law, workers who used
mass transit were limited to $125 a month tax-free to pay for their
bus, subway and train rides to the job. The new law brings parity
to the tax break, hiking the tax-free limit for transit expenses to
$240 ... retroactive to January 1, 2012.
At this writing, it's unclear exactly how transit riders will be
able to claim this money-saver. But if your employer offers a
transit-subsidy program and you spent more than $125 a month in
2012, you could be due a refund of both income and Social Security
taxes. Check with your human resources office.