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The Most-Overlooked Tax Deductions
Years ago, the fellow running the IRS 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 updated all the key details in this popular slide show to ensure that your 2015 return is a money-saving masterpiece. Cut your tax bill to the bone by claiming all the breaks you deserve.
State Sales Taxes
You may hear that this tax break expired . . . which it does regularly, only to be just as regularly revived by Congress.
That’s exactly what happened for purposes of 2015 returns. The break expired at the end of 2014 and then was revived retroactively in December 2015 to cover 2015 returns. But this time, Congress actually found the courage to make this break permanent. This is particularly important to you if you live in a state that does not impose a state income tax. 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 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 IRS even has a calculator that shows how much residents of various states can deduct, based on their income and state and local sales tax rates.
Reinvested Dividends
This isn’t a tax deduction, but it is an important subtraction that can save you a bundle. And this is the one that former IRS commissioner Fred Goldberg told Kiplinger millions of taxpayers miss . . . costing them millions 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 the IRS.
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.)
Job-Hunting Costs
If you’re among the millions of unemployed Americans who were looking for a job in 2015, 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 to:
Transportation expenses incurred as part of the job search, including 57.5 cents a mile for driving your own car plus parking and tollsFood and lodging expenses if your search takes you away from home overnightCab faresEmployment agency feesCosts of printing resumes, business cards, postage, and advertising. 10 Steps To Finding Your Dream Job
Moving Expenses to Take Your First Job
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 2015 travel, the rate is 57.5 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 for those age 65 and older. 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).
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 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 2014 state income tax return in the spring of 2015? Then, for goodness’ sake, remember to include that amount in your state-tax deduction on your 2015 federal return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments during the year.
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, 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 Paid to 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. Include your jury fees with 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 IRS.) This credit was scheduled to revert to the less-valuable Hope Credit limits in 2018, but in 2015, Congress made the better-for-you American Opportunity Credit permanent.
A College Credit for Those Long Out of College
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 2015, this credit can help pay the bills. The right to claim this tax-saver phases out as income rises from $55,000 to $65,000 on an individual return and from $110,000 to $130,000 for couples filing jointly.
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.
Bonus Depreciation … And Beefed-Up Expensing
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, the bonus depreciation rate was 50%. The break expired at the end of 2013 and stayed expired until the end of 2014 . . . when Congress reinstated it retroactively to cover 2014 purchases. (That reprieve ended on December 31, when the provision expired again . . . but near the end of 2015, Congress revived the break. The 50% bonus applies for property purchased in 2016 and 2017, too; the bonus drops to 40% in 2018 and 30% in 2019.
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. This break, too, has a habit of coming and going. But as part of the 2015 tax law, Congress made the expansion of expensing permanent. For 2015 future years, businesses can expense up to $500,000 worth of assets. The half-million-dollar cap phases out dollar for dollar for firms that put more than $2 million worth of assets into service in a single year.
Break on the Sale of Demutualized Stock
In 2015, the IRS found another 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. In 2009 and again in 2011, federal courts sided with taxpayers who challenged the IRS position. Late in 2015, though, a divided federal appellate court ruled in favor of the IRS. Sooner or later, the Supreme Court may have to settle things.
In the meantime, if you sold stock in 2015 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 it.
Article originally published on MSN.com