One thing we know for sure is that
the opportunity to make mistakes is almost unlimited, and missed deductions can
be the most costly. About 45 million of us itemize on our 1040s -- claiming more
than $1 trillion worth of deductions. That's right: $1,000,000,000,000, a number
rarely spoken out loud until Congress started tying itself up in knots trying to
deal with the budget deficit and national debt.
Another 92 million
taxpayers claim about $700 billion worth using standard deductions -- and some
of you who take the easy way out probably shortchange yourselves. (If you turned
65 in 2012, remember that you now deserve a bigger standard deduction than when
you were younger.)
Yes, friends, tax time
is a dangerous time. It's all too easy to miss a trick and pay too much. Years
ago, the fellow who ran the IRS at the time told the public that he figured millions of taxpayers overpay their taxes every year by
overlooking just one of the money-savers listed below.
State
sales taxesThis is an especially dangerous issue for 2012
returns because, throughout 2012, this tax deduction simply didn't exist. The
right for taxpayers to deduct state sales taxes paid expired at the end of 2011.
Everyone expected Congress to revive the tax break sometime during 2012, but the
issue got tangled up in fiscal cliff negotiations. Finally, in the bill approved
January 1, 2013, the deduction was restored ... retroactively for 2012 and for
2013 returns that will be filed next year.
This is particularly important
to you if you live in a state that does not impose a state income tax. You see,
Congress offers you the choice between deducting state income taxes paid or
state sales taxes paid. You choose whichever gives you the largest deduction, of
course, and 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 same goes for any homebuilding materials you purchased. These
add-on items are easy to overlook, but could make the sales-tax deduction a
better deal even if you live in a state with an income tax. The IRS has a
calculator on its Web site to help you figure the deduction.
(As this is written, the IRS is working to update the calculator for 2012
returns.)
Reinvested dividendsThis 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 told
the public 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!)
Out-of-pocket charitable
contributionsIt's hard to overlook the big charitable gifts you
made during the year, by check or payroll deduction (check your December pay
stub).
But the little things add up, too, and you can write off
out-of-pocket costs incurred while doing work for a charity. For example,
ingredients for casseroles you prepare for a nonprofit organization's soup
kitchen and stamps you buy for your school's fundraising mailing count as a
charitable contribution. Keep your receipts and if your contribution totals more
than $250, you'll need an acknowledgement from the charity documenting the
support you provided. If you drove your car for charity in 2012, remember to
deduct 14 cents per mile plus parking and tolls paid in your philanthropic
journeys.
Student-loan interest paid by Mom and
DadGenerally, 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.
Job-hunting costsIf
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 ... or can reconstruct
them. If you're looking for a position in the same line of work, 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. In any case, 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 job-search costs include, but
aren't limited to:
- Transportation expenses incurred as part of the job search, including 55.5
cents a mile for driving your own car plus parking and tolls
- Food and lodging expenses if your search takes you away from home overnight
- Cab fares
- Employment agency fees
- Costs of printing resumes, business cards, postage, and advertising
The cost of moving for your first
jobAlthough job-hunting expenses are not deductible when
looking for your first job, moving expenses to get to that job are. And you get
this write-off even if you don't itemize.
To qualify for the deduction,
your first job must be at least 50 miles away from your old home. If you
qualify, you can deduct the cost of getting yourself and your household goods to
the new area. If you drove your own car on a 2012 move, deduct 23 cents a mile,
plus what you paid for parking and tolls.
Military reservists'
travel expensesMembers of the National Guard or military
reserve may tap a deduction for travel expenses 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 2012 travel, the rate is 55.5 cents a mile, plus what you paid for
parking fees and tolls.
Deduction of
Medicare premiums for the self-employedFolks 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 and the cost of supplemental
Medicare (medigap) policies. This deduction is available whether or not you
itemize and is not subject the 7.5% of AGI test that applies to itemized medical
expenses. One caveat: You can't claim this deduction if you are eligible to be
covered under an employer-subsidized health plan offered by 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
creditA 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 pre-tax dollars -- that might 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 under 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
decedentThis 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 $35,000 to the estate-tax bill. You get to
deduct that $35,000 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 $17,500
itemized deduction on Schedule A. That would save you $4,900 in the 28%
bracket.
State tax paid last springDid you owe
tax when you filed your 2011 state income tax return in the spring of 2012?
Then, for goodness' sake, remember to include that amount in your state-tax
deduction on your 2012 federal return, along with state income taxes withheld
from your paychecks or paid via quarterly estimated
payments.
Refinancing pointsWhen 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 --
and 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 turned over to your
employerMany 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. Add your jury fees to the total of your
other write-offs and write "jury pay" on the dotted line.
American
Opportunity CreditUnlike the Hope Credit that this one has
temporarily 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 can reduce your tax to $0, but not get you a
check from the IRS.)
Deduct those blasted baggage
feesIn recent years airlines have been driving passengers batty
with extra fees for baggage and for making changes in travel plans. All
together, 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 cost to your deductible travel
expenses.
Credits for energy-saving home
improvementsIt's widely believed that tax credit for energy
saving home improvement have expired. And that's true for the credits that
encouraged homeowners to replace windows and doors, add insulation and upgrade
air conditioning and furnace systems to more energy-efficient units. But the
most valuable credits still exist ... and will through 2016. These credits
effectively refund 30% of the cost (including labor) of installing l qualified
residential alternative energy equipment, such as solar hot water heaters,
geothermal heat pumps and wind turbines. If you installed such a system in 2012,
be sure to let Uncle Sam lend you a hand with the
cost.
Additional bonus depreciationA break that
allowed business owners -- including those who run businesses out of their homes
-- to write off 100% of the cost of qualified assets placed in service expired
at the end of 2011. Although Congress did not extend this break retroactively as
part of the fiscal cliff deal, bonus deprecation didn't disappear completely –
it's available at the 50% level for qualified assets purchased in
2012.
Perhaps more valuable is a break Congress did make retroactive for
2012 purchases. The lawmakers restored a supercharged “expensing” provision --
which basically lets you write off the full cost of new assets in the year you
put them into service. While the dollar limit for expensing had fallen to
$139,000 worth of assets for 2012, the fiscal cliff deal boosted the cap to
$500,000. Note that the right to use expensing phases out if you put more than
$2 million worth of assets into service in 2012
Break on the sale
of demutualized stockThe year 2012 brought another court
victory for taxpayers battling the IRS over 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 stockholders. The IRS's longstanding position is that such stock had no
tax basis, so that when the shares were sold, the taxpayer owed tax on 100% of
the proceeds of the sale. But after a long legal struggle, a federal court ruled
in 2009 that the IRS was wrong. And this year, a federal district court sided
with taxpayers, too. The courts haven't said what the basis of the stock should
be, but many experts think it's whatever the shares were worth when they were
distributed to policyholders. If you sold stock in 2012 that you received in a
demutualization, be sure to claim a basis to hold down your tax
bill.
Tax-free transit subsidyThe fiscal cliff
deal signed by President Obama's autopen on January 2 brought a retroactive
break for commuters who use public transit to get to work in 2012. Last year,
folks who drove to work could receive up to $240 tax-free from their employers
to cover the cost of parking. But, due to a glitch in the law, workers who used
mass transit were limited to $125 a month tax-free to pay for their bus, subway
and train rides to the job. The new law brings parity to the tax break, hiking
the tax-free limit for transit expenses to $240 ... retroactive to January 1,
2012.
At this writing, it's unclear exactly how transit riders will be
able to claim this money-saver. But if your employer offers a transit-subsidy
program and you spent more than $125 a month in 2012, you could be due a refund
of both income and Social Security taxes. Check with your human resources
office.
Contact Chet at 888-753-2521 ofc or email questions to
taxmax@rocketmail.com .
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