Each year, millions of Americans miss important deductions and leave a lot of cash on the government's table, says Derrick J., a retired tax attorney in Cleveland, OH. The government often does a good job reviewing your tax return and amending it to your advantage, but fiscal authorities don't have the time and energy to dig deep into your paperwork and tell you deductions you might be missing. The fact is, if you don't tell the government anything about deductible tax events that happened in your life during the previous year, IRS agents wouldn't be able to revise your return favorably and point to tax credits that can reduce your fiscal liability and increase your refund. The most overlooked tax deductions run the operational and lifestyle gamut, from state sales taxes and jury pay to charitable contributions and moving expenses.
Jury Pay Remitted to Your Company
Jury income you earn from judiciary authorities – typically a minimal amount to thank you for your time and willingness to help advance the judicial process – often is paid directly to your employer. Alternatively, you may receive the jury income directly from your state government, and your company would require that you refund the cash to its coffers because the organization continued to pay you during your jury duty. The problem is that the IRS often demands that you report jury pay as income, and if you give that money back to your employer, you are in fact losing by claiming income you never kept in your coffers in the first place. To fix this issue, deduct the reimbursed amount on Line 21 of Form 1040 labeled "Other Income." Where it says "List type and amount," put a negative amount and write "Jury pay reimbursed to employer" or something along those lines.
Refinancing points you pay when adjusting the rate, terms and conditions of your mortgage typically are deductible over the loan maturity. For example, say you paid $3,000 in points to refinance a $500,000, 30-year mortgage. You can deduct every year $100 in refinancing points on your tax return. You may think this is peanuts compared with top dollars you deduct for property taxes and mortgage interest payments, but it still is real money that can reduce your overall income tax bill – which means, more cash in your pockets.
Estate Tax Liability on Earnings In Respect of a Descendant
If you inherit an Individual Retirement Account (IRA) from someone who was subject to the federal estate tax, you can deduct the tax paid to the government whenever you cash in the IRA. For example, if Grandpa Joe bequeathed you a $50,000 IRA, and the IRA paid $20,000 to the federal government, you can deduct part of the $20,000 each time you withdraw cash from the IRA. If you take, say, $10,000 from the IRA, you would be entitled to claim a federal deduction of $4,000 ($20,000 divided by $50,000 multiplied by $10,000) – which amounts to $1,000 tax savings if you are in the 25% tax bracket.
Student Loan Interest Someone Else Paid on Your Behalf
If your parents don't claim you as a dependent on their joint tax return, the IRS allows you to deduct up to $2,500 in student loan interest each year – assuming that your parents pay back part or the full loan amount on your behalf. This is contrary to the agency's typical stand, which says that only a person who is legally required to repay a debt can deduct student loan interest on his or her fiscal return.
Job-Related Moving Expenses
If you move more than 50 miles to get a new job, you can deduct the related expenses on your tax return. These include everything from money spent on relocation agencies and parking to costs as diverse as tolls, gas and real estate broker fees. The IRS has two tests to ascertain that you indeed qualify for moving expense deduction: time and distance. Time-wise, you must work for at least 39 weeks in the 12 months right after settling in your new residence area, or at least 78 weeks in the two years after you set foot in your new residence area. The distance requirement is 50 miles at least.
Travel Costs for Military Reservists
If you're a member of the military reserve or National Guard, you may deduct on your tax return cash spent on travel to meetings and drills. Common conditions required include traveling at least 100 miles away from home, being away from home overnight, and keeping reasonable proof – think receipts – to confirm the expenses. If you are eligible, you can deduct things like the full cost of lodging, 50% of money spent on meals, and tolls and parking fees.
If you have kids, pay attention to how much you dole out for their care and keep your paperwork handy to prove it. You could save some money here because a tax credit, unlike a fiscal deduction, reduces your tax bill dollar for dollar. Most companies have a tax-favored reimbursement scheme through which you contribute up to $5,000 for your child's care, but if you spend more than that, make sure to claim the extra cash when filing your fiscal return.
State Sales Tax
The IRS has a Sales Tax Deduction Calculator that allows you to determine how much you can deduct, depending on your situation and where you live. So, keep all your receipts and don't overlook everyday expenses as varied as equipment, home building material and groceries. Remember, even if the items don't cost much individually, they could add up to a sizable amount you can claim to reduce your overall tax bill. Now, that's more money you can take to the bank or spend on other things.
Paid-in-Cash Charitable Contributions
Don't forget to write down all small donations you make during the year to your favorite charity or other philanthropic organizations that occasionally catch your attention with their message, cause or campaign. Believe it or not, these little donations add up and can curb your overall tax bill at year-end.
Overlooking tax deductions is similar to giving tax dollars to the government, which does not even need it, says Derrick J., the Ohio-based fiscal lawyer. To minimize your fiscal bill – and increase your refund, for that matter – pay attention to deductions as diverse as child-care credit, charitable contributions and job-related moving expenses. If everything tax-related is not your forte, seek the help of a specialist. Professionals such as tax accountants, enrolled agents and certified public accountants can help you decode IRS stipulations and show you how to effectively deduct specific items.