Years ago, the fellow who was running the IRS at the time told
Kiplinger's Personal Finance magazine that he figured millions of
taxpayers overpaid their taxes every year by overlooking just one
of the money-savers listed here.
We've added several new reminders this year and updated key
details throughout this item for 2014.
State sales taxes
You may hear that this tax break expired . . . which it does
regularly, only to be just as regularly revived by Congress. Right
now, in fact, this write-off does not exist for 2014. But we bet it
will be there when you sit down with your 2014 forms. It will be
resurrected during the lame duck session of Congress after the
November elections. This is particularly important to you if you
in a state that does not impose a state income
. You see, Congress offers itemizers the choice between deducting
the state income taxes or state sales taxes they paid. You choose
whichever gives you the largest deduction. So if your state doesn't
have an income tax, the sales tax write-off is clearly the way to
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 tax agency even has an online calculator
that does all the calculations for you.
This isn't a tax deduction, but it is an important subtraction
that can save you a bundle. And former IRS commissioner Fred
Goldberg told Kiplinger that missing this break costs millions of
taxpayers a lot in overpaid taxes.
If, like most investors, you have mutual fund dividends
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 reinvested dividends
in your basis results in double taxation of the dividends--once in
the year when they were paid out and immediately reinvested 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.
Funds often report to investors the tax basis of shares redeemed
during the year. In fact, for the sale of shares purchased in 2012
and later years, funds must report the basis to investors and to
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
But 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 a school's
fund-raising mailing count as charitable contributions. Keep your
receipts. If your contribution totals more than $250, you'll also
need an acknowledgement from the charity documenting the support
you provided. If you drove your car for charity in 2014, remember
to deduct 14 cents per mile, plus parking and tolls paid, in your
Student-loan interest paid by Mom and Dad
Generally, you can deduct interest only if you are legally
required to repay the debt. But if parents pay back a child's
student loans, the IRS treats the transactions as if the money were
given to the child, who then paid the debt. So as long as the child
is no longer claimed as a dependent, he or she can deduct up to
$2,500 of student-loan interest paid by Mom and Dad each year. 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 because they are not liable for the debt.)
If you're among the millions of unemployed Americans who were
looking for a job in 2014, we hope you were successful . . . and
that you kept track of your job-search expenses or can reconstruct
them. If you were looking for a position in the same line of work
as your current or most recent job, 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. But 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 costs include, but aren't limited
- Transportation expenses incurred as part of the job search,
including 56 cents a mile for driving your own car plus parking
- 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
Moving expenses to get 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 2014 move, deduct 23.5 cents a mile, plus what
you paid for parking and tolls. For a full list of deductible
expenses, check out
IRS Publication 521
Military reservists' travel expenses
Members of the National Guard or military reserve may write off
the cost of travel 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 2014 travel, the rate is 56
cents a mile, plus what you paid for parking fees and tolls. You
may claim this deduction even if you use the standard deduction
rather than itemizing.
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, plus the cost of supplemental Medicare
(medigap) policies or the cost of a Medicare Advantage plan. This
deduction is available whether or not you itemize and is not
subject to 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 either 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).
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 pretax dollars--that's likely to 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 younger than
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 $40,000 to the estate-tax bill.
You get to deduct that $40,000 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 $20,000 itemized deduction on Schedule
A. That would save you $5,600 in the 28% bracket.
State tax paid last spring
Did you owe tax when you filed your 2013 state income tax return
in the spring of 2014? Then, for goodness' sake, remember to
include that amount in your state-tax deduction on your 2014
federal return, along with state income taxes withheld from your
paychecks or paid via quarterly estimated payments during the
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, then 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 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 are "nonrefundable," meaning
they can reduce your tax to $0, but not get you a check from the
College credits aren't just for youngsters, nor are they limited
to just the first four years of college. The Lifetime Learning
credit can be claimed for any number of years and can be used to
offset the cost of higher education for yourself or your spouse . .
. not just for your children.
The credit is worth up to $2,000 a year, based on 20% of up to
$10,000 you spend for post-high-school courses that lead to new or
improved job skills. Classes you take even in retirement at a
vocational school or community college can count. If you brushed up
on skills in 2014, this credit can help pay the bills. The right to
claim this tax-saver phases out as income rises from $54,000 to
$64,000 on an individual return and from $108,000 to $128,000 for
couples filing jointly.
Deduct those blasted baggage fees
Airlines seem to revel in driving travelers batty with extra
fees for baggage, online booking and for changing travel plans.
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
costs to your deductible travel expenses.
Credits for energy-saving home improvements
There's no longer a tax credit to encourage homeowners to save
energy by, for example, installing storm windows and insulation.
But the law still offers a powerful incentive for those who install
qualified residential alternative energy equipment, such as solar
hot water heaters, geothermal heat pumps and wind turbines. Your
credit can be 30% of the total cost (including labor) of such
systems installed through 2016.
Additional bonus depreciation
Business owners--including those who run businesses out of their
homes--have to stay on their toes to capture tax breaks for buying
new equipment. The rules seem to be constantly shifting as Congress
writes incentives into the law and then allows them to expire or to
be cut back to save money . Take "bonus depreciation" as an
example. Back in 2011, rather than write off the cost of new
equipment over many years, a business could use 100% bonus
depreciation to deduct the full cost in the year the equipment was
put into service. For 2013, that bonus depreciation was 50%. The
break expired at the end of 2013, but we expect Congress to
reinstate it retroactively for 2014 purchases.
Perhaps even more valuable, though, is another break:
supercharged "expensing," which basically lets you write off the
full cost of qualifying assets in the year you put them into
service. The dollar limit for expensing seems to change every year.
For 2013 purchases, it applied to up to $500,000 worth of assets.
The $500,000 cap phased out dollar for dollar for firms that put
more than $2 million worth of assets into service in 2013. For
2014, the limit is just $25,000 and it phases out once more than
$200,000 of assets are placed in service. As with bonus
depreciation, however, we expect 2013's more generous provisions to
be reinstated retroactively to cover 2014 purchases. We'll update
this once Congress acts during its lame-duck session in November
Break on the sale of demutualized stock
In 2013, the IRS finally found a court that agrees with its
tough stand on 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 shareholders. The IRS's longstanding position is that such
stock has no tax basis, so that when the shares are sold, the
taxpayer owes tax on 100% of the proceeds of the sale. In 2009 and
again in 2011, federal courts sided with taxpayers who challenged
the IRS position. Shortly after the IRS won its case in early 2013,
the court in one of the earlier cases came up with a complicated
method to pinpoint a basis. Rather than agreeing with experts who
say the basis should be 100% of the stock's value at the time of
the demutualization, the court's method set the basis in the case
at hand at between 50% and 60% of the stock's value when the
taxpayers received it. Sooner or later, the Supreme Court may have
to settle things.
In the meantime, if you sold stock in 2014 that you received in
a demutualization, you have a couple of choices. Claim a basis and,
if the IRS rejects your position, file an appeal. Or use a zero
basis, pay the tax on the full proceeds of the sale and then file a
"protective refund claim" to maintain your right to a refund if the
matter is eventually settled in your favor.
Social Security taxes you pay
This doesn't work for employees. You can't deduct the 7.65% of
pay that's siphoned off for Social Security and Medicare. But if
you're self-employed and have to pay the full 15.3% tax yourself
(instead of splitting it 50-50 with an employer), you do get to
write off half of what you pay. That deduction comes on the face of
Form 1040, so you don't have to itemize to take advantage of
Waiver of penalty for the newly retired
This isn't a deduction, but it can save you money if it protects
you from a penalty. Because our tax system operates on a pay-as-you
earn basis, taxpayers typically must pay 90% of what they owe
during the year via withholding or estimated tax payments. If you
don't, and you owe more than $1,000 when you file your return, you
can be hit with a penalty for underpayment of taxes. The penalty
works like interest on a loan--as though you borrowed from the IRS
the money you didn't pay. The current rate is 3%.
There are several exceptions to the penalty, including a
little-known one that can protect taxpayers age 62 and older in the
year they retire and the following year. You can request a waiver
of the penalty--using
--if you have reasonable cause, such as not realizing you had to
shift to estimated tax payments after a lifetime of meeting your
obligation via withholding from your paychecks.
Amortizing bond premiums
If you purchased a taxable bond for more than its face value--as
you might have to capture a yield higher than current market rates
deliver -- Uncle Sam will effectively help you pay that premium.
That's only fair, since the IRS is also going to get to tax the
extra interest that the higher yield produces.
You have two choices about how to handle the premium.
- You can amortize it over the life of the bond by taking
each year's share of the premium and subtracting it from the
amount of taxable interest from the bond you report on your tax
return. Each year you also reduce your tax basis for the bond
by the amount of that year's amortization.
- Alternatively, you can ignore the premium until you sell or
redeem the bond. At that time, the full premium will be
included in your tax basis so it will reduce the taxable gain
or increase the taxable loss dollar for dollar.
The amortization route can be a pain, since it's up to you to
both figure how each year's share and keep track of the declining
basis. But it could be more valuable, since the interest you don't
report will avoid being taxed in your top tax bracket for the
year--as high as 43.4%, while the capital gain you reduce by
waiting until you sell or redeem the bond would only be taxed at
0%, 15% or 20%.
If you buy a tax-free municipal bond at a premium, you must use
the amortization method and reduce your basis each year . . . but
you don't get to deduct the amount amortized. After all, the IRS
doesn't get to tax the interest.
Don't unnecessarily report a state income tax refund
There's a line on the tax form for reporting a state income tax
refund, but most people who get refunds can simply ignore it even
though the state sent the IRS a copy of the 1099-G you got
reporting the refund. If, like most taxpayers, you didn't itemize
deductions on your previous federal return, the state tax refund is
tax-free. Even if you did itemize, part of it might be tax-free.
It's taxable only to the extent that your deduction of state income
taxes the previous year actually saved you money. If you would have
itemized (rather than taking the standard deduction) even without
your state tax deduction, then 100% of your refund is
taxable--since 100% of your write-off reduced your taxable income.
But, if part of the state tax write-off is what pushed you over the
standard deduction threshold, then part of the refund is tax free.
Don't report any more than you have to.
Legal fees paid to secure alimony
Although legal fees and court costs involved in a divorce are
generally nondeductible personal expenses, you may be able to
deduct the part of your attorney's bill. Since alimony is taxable
income, you can deduct the part of the lawyer's fee that is
attributable to setting the amount. You can also deduct the portion
of the fee that is attributable to tax advice. You must itemize to
get any tax savings here, and these costs fall into the category of
miscellaneous expenses that are deductible only to the extent that
the total exceeds 2% of your adjusted gross income. Still, be sure
your attorney provides a detailed statement that breaks down his
fee so you can tell how much of it may qualify for a tax-saving