The 13 Most Overlooked Tax Deductions
Tax time is a dangerous time. It’s all too easy to miss a trick and pay too much.
1. State Sales Taxes. Last December, Congress resurrected the chance for taxpayers to deduct state and local sales taxes. Although all taxpayers have a shot at this write-off, it makes sense primarily for those who live in states that do not impose an income tax. Here’s how to claim this deduction: Enter your write-off on line 5 of Schedule A and write “ST” on the dotted line to the left of that line.2. $250 Educators’ Expenses. This break, too, lost its place on the tax forms because it expired at the end of 2005 and wasn’t reinstated until the 2006 forms were set. If you qualify, put your deduction on line 23 of the Form 1040, the line now used for the Archer medical savings account (MSA) deduction, and write “E” on the dots to the left.
3. College Tuition. You won’t find this one on the forms, either, but you may qualify to deduct up to $4,000 you paid in college tuition in 2006 for yourself, your spouse or a dependent. For 2006 returns, the deduction is taken on line 35 of the Form 1040, the line for the domestic production deduction. Write “T” to the left of that line.
4. Student loan interest paid by Mom and Dad. To get a deduction, the law held that you had to be both liable for the debt and actually pay it yourself. But now there’s an exception! If mom and dad pay back the loan, IRS treats it as though they gave the money to their 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.
5. Out-of-Pocket Charitable Contributions. Ingredients for lasagne you regularly prepare for a nonprofit organization’s soup kitchen, for example, or if you drove your car for charity in 2006, deduct 14 cents a mile, unless you were doing Hurricane Katrina relief work. In that case, you get 32 cents a mile.
6. Moving expense to take First Job. Here’s an interesting dichotomy: Job-hunting expenses incurred while looking for your first job are not deductible; but moving expenses to get to that first job are. And you get this write-off even if you don’t itemize.
7. Military Reservists Travel Expenses. If you are a member of the National Guard or military reserve, you may deserve a deduction for travel expenses to drills or meetings. To qualify, you must travel more than 100 miles and be away from home overnight.
8. Child-Care Credit. A credit is so much better than a deduction: It reduces your tax bill dollar for dollar. Until a few years ago, the child-care credit applied to no more than $4,800 of qualifying expenses. And, the law allows you to run up to $5,000 of such expenses through a tax-favored reimbursement account at work.
9. Estate Tax on Income in Respect of a Decedent. This applies 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 balance. Let’s say you inherited a $100,000 IRA, and the fact that the $100,000 was included in your benefactor’s estate added $45,000 to the estate tax bill. As you withdraw the money from the IRA and pay tax on it, you also get to deduct a proportional amount of the estate tax paid.
10. State tax you paid Last Spring. Did you owe tax when you filed your 2005 state tax return in the spring of 2006? Then remember to include that amount with your state-tax deduction on your 2006 return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments.
11. Refinancing Points. When you buy a house, you get to deduct points paid to get your mortgage in one fell swoop. When you refinance a mortgage, though, you have to deduct the points over the life of the loan. That means 1/30th 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. And, in the year you pay off the loan — because you sell the house or refinance again — you may get to deduct all as-yet-undeducted points. You do unless you refinance with the same lender. In that case, you add points on the latest deal to the leftovers from the previous refinancing and deduct the expense ratably over the life of the new loan.
12. Reinvested Dividends. If, like most investors, you have mutual fund dividends automatically invested in extra shares, remember that each reinvestment increases your “tax basis” in the fund. That reduces the taxable capital gain (or increases the tax-saving loss) when you redeem shares. Forgetting to include the reinvested dividends in your basis — which you subtract from the proceeds of sale to pinpoint your gain — means overpaying your tax.
13. Jury Pay Paid to Employer. Here’s a break that’s not as easy to miss this year as in the past: Jury pay you turned over to your employer. The only problem is that the IRS demands that you report those fees as taxable income. Enter it on line 13 if you file the Form 1040A or on line 34 if you use the full-fledged 1040.
