A reader named Brandon recently wrote in to encourage me to write more about commonly missed income tax deductions. As it turns out, he dug up my article from last year and wound up saving $200 on the retirement tax credit that he would’ve otherwise missed. With that in mind, I thought I’d highlight this list of eleven commonly overlooked tax deductions from a recent issue of Kiplinger’s .
- State sales taxes. This one makes the most sense for people in states without an income tax, as you can choose between deducting your state sales tax and state income tax. Nonetheless, since you can use a tabled value to figure your deduction, it’s always a good idea to run it both ways.
- Reinvested dividends. While this isn’t technically a deduction, it’s a tax break that a lot of people miss out on. If you’ve been reinvesting dividends, the cost basis of your holdings are higher than you might otherwise think. This in turn reduces your capital gains (or increases your capital losses) when selling.
- Out-of-pocket charitable contributions. Keep track of mileage driven for charity, as well as all those smaller contributions you make throughout the year.
- Student loan interest paid by Mom and Dad. Since the IRS treats student loan repayments by parents as a gift to their child, students that aren’t claimed as dependents can actually deduct up to $2, 500 of the loan interest paid by their parents.
- Moving expense to take first job. Expenses related to finding your first job are not deductible, but your moving expenses are, even if you don’t itemize. As long as you move more than 50 miles, you can deduct the cost of getting yourself and your stuff to the new locale. You can even deduct mileage.
- Military reservists travel expenses. Members of the National Guard or military reserve can deduct travel expenses related to drills or meetings as long as they travel over 100 miles and are away overnight. The deduction covers the cost of lodging plus half the cost of your meals. You can also deduct mileage, parking fees, and tolls.
- Child-care credit. If you pay someone to take care of your kids such that you can work, you might qualify for a tax credit. Note that this is true even if you claim your childcare-related expenses through a tax-favored reimbursement account at work because such accounts are capped at $5, 000 while expenses up to $6, 000 can qualify for the credit.
- Estate tax on income in respect of a decedent. You can get an income-tax deduction for the amount of estate tax paid on an IRA the you inherit from someone else.
- State tax you paid last spring. If you owed state taxes when you filed your 2007 return, you can deduct that amount along with the state income taxes that were withheld during 2008.
- Refinancing points. Any points that you pay when you refinance can be deducted (on a monthly basis) over the life of the new loan. Moreover, all unamortized mortgage points left over from prior years are deducted all at once if you end up refinancing your mortgage in any particular year.
- Jury pay paid to employer. Some employers continue to pay their employees’ full salary when they’re on jury duty, but require that the employees turn over their jury pay. Since the IRS views this as taxable income, you need to be sure to deduct it. If you don’t, you’ll end up paying double taxes on a portion of your income.
Also be sure to check out my list of common income tax deductions. Keep in mind that these sorts of deductions not only reduce your tax liability, but could also keep you from slipping into the next higher income tax bracket. The last thing you want to do is pay too much in the way of taxes!
9 Responses to “Commonly Overlooked Income Tax Deductions”
Are funeral expenses deductable?
I have to chime in. I have done taxes for many years and I can tell you that many people make very costly mistakes when donating items to charities like Goodwill or the Salvation Army. The mistake I see very often is that on the receipt people will state that they donated “clothes” or “bag of clothes”. It is very important to itemize what you gave, or the IRS would assume that you gave a bag full of old undershirts. For something like that, we would just give an arbiterary $15 deduction if there is no indication as to what kind of clothes were donated. If you itemize your donation like this
– 10 t-shirts
– 5 pairs of jeans
– 12 pairs of shorts
– 3 pairs of dress slacks
– 5 mens dress shirts
– 3 womens dresses
Then it is a lot easier to determine the fair market valaue of what you donated. It also allows you to get a higher deduction. In my this example, all of that could fit into 2 garbage bags. That would be a $30 deduction if you itemized this as 2 bags of clothes. If you itemized as I did, your deduction would be $117. The $117 figure is based on what my local Goodwill says is average fair market value, and it is based on my memory (I am not looking at a cheat sheet). And don’t forget to write-off the mileage driving to and from the donation center.
Someone once said to me that, payments in-lue of taxes are deductable. i.e. sewer bills paid to the municipality in which you live…any thoughts on that?
The $1000 tax deduction for your children is great. I also learned that even if your child was born on Dec. 31st you still get this deduction.
Also I don’t know if this deduction is still around but I you have updated your home and added any new doors, window, insulation, or evern reroofed your home you may get a deduction for that. You may want to ask your CPA about that one as well.
State sales taxes are deductible because some states don’t have an income tax. But if you live in a state with both a sales and income tax, then you have to choose which one you want to deduct. In that case, the sales tax deduction is usually only better if you made a large purchase – e.g. car.
Didn’t remember about dividends – thanks!
I”m curious to know if state taxes you are paying through say a chapter 13 bankruptcy would be able to be deducted from 2008 tax return?
I keep all my charitable contribution info now, every little bit helps.
I don’t understand why we would have a deduction for state taxes paid or even state taxes withheld? How is this worded on the tax form?
Great article… You might want to clarify, though, that job hunting expenses are itemizable deductions if they’re not for your first job or a position in another industry. I had to read that entry a few times to see you were referring to first jobs only…
From Kiplinger’s: As long as you’re searching for a new job in the same line of work, employment and outplacement agency fees are deductible, as are travel expenses if the trip is primarily to look for a new job. It doesn’t matter whether you get that job. Even if you just need to drive across town for a job interview, you can deduct your mileage — 58.5 cents a mile for travel on July 1 or later; 50.5 cents per mile for the first half of 2008. You can also deduct the cost of printing and mailing rÃ©sumÃ©s.
You can’t deduct job-search expenses for your first job or for a job in another line of work.
This write-off is considered a miscellaneous itemized deduction (like employee business expenses and investment-related expenses) and is deductible only if you itemize your deductions on your tax return. Only miscellaneous expenses that exceed 2% of your adjusted gross income are deductible.