The following are the most overlooked tax deductions. Not every item will be applicable to your situation. Most taxpayers are entitled to the standard deduction - a fixed amount that reduces the amount of income on which you are taxed. However, certain kinds of deductions are called itemized deductions. If you have enough of them to beat the standard deduction, it is usually a good idea to itemize instead.
This write-off makes sense primarily for those who live in states that do not impose an income tax. You must choose between deducting state and local income taxes, or state and local sales taxes. For most citizens of income-tax states, the income tax deduction usually is a better deal. IRS has tables for residents of states with sales taxes showing how much they can deduct. But the tables aren't the last word.
If you purchased a vehicle, boat or airplane, you get to add the state sales tax you paid to the amount shown in IRS tables for your state, to the extent the sales tax rate you paid doesn't exceed the state's general sales tax rate. The same goes for home building materials you purchased. These items are easy to overlook. The IRS even has a calculator on its Web site to help you figure out the deduction, which varies by your state and income level.
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!)
It's hard to overlook the big charitable gifts you made during the year by check or payroll deduction. But the little things add up, too, and you can write off out-of-pocket costs you incur while doing good deeds. Ingredients for casseroles you regularly prepare for a nonprofit organization's soup kitchen, for example, or the cost of stamps you buy for your school's fundraiser count as a charitable contribution. If you drove your car for charity in 2012, remember to deduct 14 cents per mile.
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.
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. 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. If you moved more than 50 miles, you can deduct 23 cents per mile of the cost of getting yourself and your household goods to the new area, (plus parking fees and tolls) for driving your own vehicle.
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.
But it's easy to overlook the child care credit if you pay your child care bills through a reimbursement account at work. Until a few years ago, the child care credit applied to no more than $4,800 of qualifying expenses. The law allows you to run up to $5,000 of such expenses through a tax-favored reimbursement account at work.
Now, however, up to $6,000 can qualify for the credit, but the old $5,000 limit still applies to reimbursement accounts. So if you run the maximum $5,000 through a plan at work but spend more for work-related child care, you can claim the credit on up to an extra $1,000. That would cut your tax bill by at least $200.
Millions of lower-income people miss out on this every year. However, 25% of taxpayers who are eligible for the EITC fail to claim it, according to the IRS. Some people miss out on the credit because the rules can be complicated. Others simply aren't aware that they qualify.
The EITC is a refundable tax credit - not a deduction - ranging from $475 to $5,891. The credit is designed to supplement wages for low-to-moderate income workers. But the credit doesn't just apply to lower income people. Tens of millions of individuals and families previously classified as "middle class" - including many white-collar workers - are now considered "low income" because they lost a job, took a pay cut, or worked fewer hours last year.
The exact refund you receive depends on your income, marital status and family size. To get a refund from the EITC you must file for a tax refund, even if you don't owe any taxes. Moreover, if you were eligible to claim the credit in the past but didn't, you can file any time during the year to claim an EITC refund for up to three previous tax years.
Did you owe taxes when you filed your 2011 state tax return in the spring of 2012? Then remember to include that amount with your state tax itemized deduction on your 2012 return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments.
When you buy a house, you get to deduct points paid to obtain your mortgage all at one time. When you refinance a mortgage, however, you have to deduct the points over the life of the 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. Doesn't seem like much, but why throw it away?
Also, in the year you pay off the loan, because you sell the house or refinance again, you get to deduct all the points not yet deducted, unless you refinance with the same lender.
Some employers continue to pay employees' full salary while they are doing their civic duty, but ask that they turn over their jury fees to the company coffers. The only problem is that the IRS demands that you report those fees as taxable income. If you give the money to your employer you have a right to deduct the amount so you aren't taxed on money that simply passes through your hands.