Despite wanting to save as much money as possible while paying taxes, there are several deductions that we often do not apply for, simply because we are not aware of the provision. Here, we have provided a list of commonly overlooked tax write-offs that may help you save some money while filing your tax returns.
Attempting to save money during the tax season would churn out an enormous volume of paperwork. Hence, it is always advisable to maintain detailed and accurate documentation for this purpose.
For some unexplained reason, many of us simply hate paying income tax. The issue although unresolved, stands quite strongly in the minds of the people, so much so that, the Internal Revenue Service, abbreviated as IRS, is sometimes sarcastically quoted to be the ‘income robbery services’. Now, although the government taxes us, it has left some really good tax deduction provisions for our convenience. The problem is, although you always avail some really good ones, you miss out on a significant number of sneaky provisions that you might not be aware of, which can significantly add to your savings.
Tax Deductions That Are Commonly Overlooked
To be accurate, an exemption is an expense or a kind of income that is needed, and it would be morally incorrect to tax it. So, if you didn’t plan ahead last year, then you can use this information while filing your returns this year.
Retirement Savings Tax Credit
The people who have been making valid savings in a retirement plan can be eligible for this federal tax credit. The criteria to be eligible are that you must be either:
- Single/married, but filing the return separately/a qualifying widow(er), with an income of up to USD 27,750
- Head of your household with an income of up to USD 41,625
- A married couple filing the returns jointly, with incomes up to USD 55,500
One can take credit up to USD 1,000 or USD 2,000 if the returns are filed jointly. This credit is a percentage of the savings from 10% to 50%. It also depends on your overall income and filing status.
If you are eligible for this credit, consider the Roth IRA plan. It will enable your contributions to grow tax-free, and the distribution of the plan will not be taxable when you retire.
If making contributions to charitable causes is something you do often, then you can get substantial savings from these tax deductions. Your contributions, monetary or otherwise, have to be made to a recognized charity to be eligible. Also, if you are entitled to get any goods or services in return for your contribution, you can only deduct the amount that is greater than the fair market value of that service. Other charitable expenses such as the purchase of the ingredients you use to make food for the charity, or fuel expenses of using your vehicle on behalf of the charity are also deductible. It is important that you have a record of all expenses in a bank statement or in a letter from the charitable organization, mentioning their name, the date and amount of the contribution, and the fair market value of any service or merchandise offered.
Job Search and Relocation Expenses
In case you are looking for a new job or have to relocate your residence due to the location of the new job, some of the related expenses can be deducted in the tax returns. To be eligible, your expenses should be for a job in the same occupation as the last. You can deduct travel expenses, placement agency fees, cost of phone calls to prospective employers, and any expenses spent on the preparing, printing, and mailing of resumes provided you have: (i) valid receipts; and (ii) your itemized deductions are greater than two percent of your gross income.
If you moved residence for your new job, then the moving expenses can be deducted. You are eligible for this if your new home is located in close relation to the time and place of the start of your new job, i.e., your move should occur within one year of the start of your job, and the distance between your workplace and home should not exceed that of your old home to the workplace.
One also needs to pass the time and distance test, i.e., the new workplace should be 50 miles further from your old home than the old workplace. Also, you have to work for at least 39 weeks in a full-time job during the first year in the area of the new job, or 78 weeks in the first two years if you are self-employed. These tests are not applicable to an active member of the armed forces.
State and Local Tax Deductions
Those people who choose to go for itemized deductions can deduct the full expenses incurred from state and local income taxes. Income tax, personal property tax, general sales tax, and real estate tax are the types of non-business taxes that can be deducted. Of these, you can choose either general sales tax or income tax; not both. Real estate and personal property taxes must be charged on a yearly basis even if they are collected less or more than once a year. Federal income taxes, social security taxes, transfer taxes on the sale of property, estate and inheritance taxes, and service charges for water, sewer, or trash collection are a few taxes that cannot be deducted. Now, starting in 2013, all itemized deductions are being phased out according to the changed gross income.
Educational Expenses for Higher Studies
The money you pay for tuition as fees for higher education can be deductible as well. This is applicable if the eligible student is your dependent, spouse, or yourself. Tax credits, saving plans, and deductions like these can help in saving money for education. However, there are certain restrictions. A person cannot claim this deduction if:
- Another person can claim exemption from the same student on their returns
- You are married, but are filing your return separately
- Your modified gross income exceeds USD 80,000 or USD 160,000 (in case of joint returns)
- You were a non-resident alien in that particular year
- If you claim education credit to finance the student
Fees for student activities, course materials, and other related equipment are eligible only if they are a part of the conditions for enrollment of the institution. If eligible, one may also claim expenses related to student loan interest, work-related education, education required by law, scholarships, and educational assistance programs as deductions. You can reduce your taxable income by up to USD 4,000 by tuition and fees deductions.
Medical and dental care expenses for you, your spouse, and dependents can be claimed as tax deductions. You can deduct the expenses that exceed 10% of your adjusted gross income or 7.5% in case the spouse is 65 years of age or older. These expenses can include medical or long-term care insurance policies. However, those policies whose premiums are paid by your employer or by you through an employer-sponsored policy cannot be included. Other deductible expenses may include, but are not limited to:
- Fees given to various health care professionals
- Fees paid for services at hospitals or nursing homes
- Payments for programs to help quit drinking, smoking, or drug addiction
- Expenses for buying prescribed medications
- Attendance and transport cost for medical conferences in reference to any disease you, your spouse, or dependent may have
- Expenses for aids of handicaps such as prescribed glasses, hearing aids, crutches, false teeth etc.
You cannot include the following as deductible expenses:
- Medications that are not bought with or do not require prescriptions
- Programs for general improvement of health
- Cosmetic surgery
Dependent and Child Care Credit
If you are paying someone for daycare services for your child or dependent, you might be eligible for tax credit. To qualify, your child/dependent should be 12 years of age or younger. If the age is higher, then the dependent/child has to be physically/mentally unable to take care of himself/herself. There are certain criteria that the care-provider has to pass too.
- This person cannot be your dependent
- If this person is your son or daughter, he/she should be 19 years or older
- You should have all the details about this person such as his name, address, social security number, etc.
Also, you and your spouse should have an earned income. You have to provide at least half of the cost of maintaining a home for your dependent. If the parents are separated, only the custodial parent can avail the credit.
People paying the daycare cost of their child or adult dependents with disabilities can save tax credit worth 20-35% of the expenses depending on the modified gross income.
Points on Mortgage Refinance
‘Points’ are a kind of charge paid to get a home mortgage. They may be deducted from tax as a home mortgage interest if you choose to itemize your deductions. If you deduct all points on a mortgage, you deduct all the interest. However, this is not applicable if your acquisition debt is higher than USD 1,000,000 or if the home equity debt is higher than USD 100,000. The requirements to be eligible for this deduction are:
- The loan is on your primary residence
- It is a regular practice to use the points system in your area
- You report your income in the same year that you are paid, and deduct any expenses in the same year you pay them
- You don’t use the points to pay for expenses such as inspection fees, property taxes, attorney fees, etc.
- You cannot pay for the points using funds lent by a broker or lender
- You use the loan to buy/build your primary residence
- The amount is clearly mentioned as points on the settlement statement
Any points that do not meet the above standards can be deducted over the lifespan of the loan, and points used for refinancing can be deducted over the time period of the mortgage.
Energy-saving Home Improvements
If you have made many energy-efficient home improvements in this year, you might be eligible for tax credit on your returns. To make sure that the improvements made to your home qualify for this credit, you should get the manufacturer’s credit certification statement. The items that are eligible for this credit are:
- You can claim for 10% credit on the cost of items such as qualified windows, doors, insulation, roof, etc.
- You might be able to claim the full amount on certain energy-efficient equipment like qualified air conditioners and water heaters
- You can claim 30% credit on the cost of any alternative energy equipment in your home such as solar water heaters and wind turbines
The best part is, there is no credit limit. If your credit amount is higher than the amount of tax that you have to pay, the remainder can be used the next year.
Earned Income Tax Credit (EITC)
This credit is aimed towards those people who have a low-moderate income. It helps lower the amount of tax one has to pay and might also enable one to get refunds. To qualify, you must have the following requirements:
- You and your spouse (in case of joint returns) should be in possession of a valid social security number
- You should have an earned income by working for an employer or you through your own business
- If you are married, you cannot file the returns separately
- You cannot be a child or dependent of another qualifying person
- You should be able to meet the specific EITC limit of earned income, investments, etc.
- You have to file a tax return even if you don’t owe any tax if you qualify for EITC
This list would churn out an enormous volume of paperwork. Hence, it is always advisable to maintain detailed and accurate documentation for this purpose. Get out all your bank statements and classify all the expenditures that you undertook in the past year. Total the expenditure, and in the process, exclude those that are not eligible for deduction. Total up the amount. Now, you will be able to compute the depreciation. You can also make a personal balance sheet for the same.
Note: All the information this article is taken from US Government sources. So, the information can be assumed to be accurate. However, it is always advisable to seek the assistance of an tax attorney if you find a problem in interpreting any law.