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8 easy-to-miss deductions

One easy way to lower your taxes is to take all the tax breaks you're eligible for. Check out this list of commonly overlooked deductions.

By Stacy Johnson Feb 16, 2012 12:21PM

This post is from Brandon Ballenger at partner site Money Talks News.


Americans love tax breaks.


A January study by the National Association of Home Builders found a majority of homeowners would rather keep certain tax deductions -- for charitable giving, mortgage interest and local income tax -- than lower their overall tax rate.


But those are just a few of the better-known tax breaks.


In the video below, Money Talks News founder and CPA Stacy Johnson highlights some of the easily overlooked deductions and credits. Check it out, and then read on for more. (Post continues below video.)

Stacy just cited five tax breaks you don’t want to forget. Here’s a recap with a few more:

 

Charity
 
You can deduct the value of any cash or property donations to a legitimate charity, although you’ll need a receipt if you get audited. Volunteers can’t deduct for time, but they can get 14 cents per mile traveled to and from charity work, plus out-of-pocket expenses from that work, including supplies and required uniforms. For more details, check out the IRS page on charitable contribution deductions.


Child care
 
The Child and Dependent Care Credit helps cover the cost of daycare (20% to 35%, depending on income), but many people aren’t aware it also extends to the cost of summer day camps (but not overnight-stay camps) and even housekeeping.


Retirement

 

Retirement contributions often qualify for a deduction (which reduces your income) but they can also net you a credit (which directly reduces what you owe) if you make under $27,750 a year. It’s called the Retirement Savings Contribution Credit or Savers Credit, and it can save you up to 50% of the first $2,000 put toward an IRA (including Roth) or work plan.


Job hunting
 

If you’ve moved at least 50 miles for a job, you may be able to deduct moving expenses. But if you’re actively seeking work, many other costs are deductible, too – employment agency fees, resume preparation, business cards, travel (at 51 cents per mile through June, 55.5 cents after) and so on. But there are catches: It has to be for work in the same field, and it’s only for those who itemize. That means it won’t help unless these expenses total more than 2% of your adjusted gross income. But this falls under miscellaneous deductions, and not all of them have the 2% rule, so skim through the list for other ideas.


School

 

Knowledge is power and lowers taxes. There are two education credits and three deductions -- but you can’t get them all.


The American Opportunity tax credit may be the best option at up to $2,500 because it is partially refundable -- meaning that you can get more money back than you paid in. But it’s only available for the first four years spent on an undergraduate degree. If you can’t claim that, there’s the Lifetime Learning Credit of up to $2,000, which is available for as many years as you qualify and includes graduate classes and any job training courses.


Then, the deductions: You can deduct student loan interest up to $2,500. There is also a straight tuition and fees deduction of up to $4,000, but it’s subject to that pesky over-2%-of-adjusted-gross requirement and you can’t claim the same expenses used for an education credit.

 

Bonus deduction for grade school teachers: Up to $250 on school supplies and books.


For the details on all of these, check out Publication 970.


Military service
 

If you’re in the reserves and traveled more than 100 miles last year for training or other duties, you can deduct hotel stays, half your meal costs and your travel costs (parking, tolls, mileage). No need to itemize. The IRS has other tax tips for servicemen and women -- for instance, pay from any month you spent in a combat zone is not taxable.


Medical expenses
 

Many people pass up health care costs at tax time, but do the math if you had big bills last year -- expenses totaling more than 7.5% of your adjusted gross income will reduce your taxable income, and there are a lot of qualifying medical expenses to include, like insurance premiums (including what you pay into an employer plan) and travel to and from treatments.


The self-employed can deduct all their insurance premiums as long as they made a net profit for the year and aren’t covered by another employer (including a spouse).


Energy efficiency
 

There are two credits for people who made energy-efficient home improvements in 2011, although one of them has shrunk a lot in the past few years and may only be worthwhile if you haven’t taken it before -- it now has a lifetime limit of $500. That’s the Nonbusiness Energy Property Credit, and it lets you deduct 10% of the cost of qualified improvements, stuff like insulation and windows. If the IRS considers the improvement "residential property" -- a new AC unit or water heater -- you can include labor costs in that calculation.


But going green is the real way to keep your green. The Residential Energy Efficient Property Credit has no cap, includes labor, and is worth 30% of the cost on qualifying solar panels, solar heaters and geothermal heaters.


More from Money Talks News and MSN Money:

VIDEO ON MSN MONEY

1Comment
Feb 18, 2012 12:44PM
avatar

The difference between a credit and a couple of types of deductions (as the terms write-off, credit and deduction are thrown around loosely):

  A credit is a reduction of your calculated tax.  To calculate the equivalent in 'deduction' dollars, divide by your marginal tax rate.  That will tell you if the money spent was worth the credit.  Some credits are refundable (or first reduce your tax and then any balance left is returned to you as a refund).  This does not lower your AGI like a deduction (1 and 2 below).  AGI is used often as a benchmark to qualify for many credits and deductions, so a credit, although powerful, doesn't help your AGI. And believe me, the window and insulation companies know you potentially qualify for a credit and build it in the price...Many credits (and deductions for that matter) are designed to legislate sheeple behavior.  Calculate before blindly buying soleley because there is a credit involved.

  A deduction is a reduction of the income you report - there are a few types of deductions

    1.  An expense, such as the depreciation or section 179 deduction reduces the reported income on page 1 of the 1040 - upper lines (business income in this case, generally).  Another deduction is your 401K contribution.  Take a look at your W2 - see box 1, it will be lower than the SS wages by the amount you contribute and save for your own retirement via an employer plan.  Box 1 is what goes on your 1040 page 1 line 7, not the gross wage amount used to calculate SS and medicare tax. BTW depreciation and 179 expense not only lower your AGI but they lower the SE tax calculated - so although not a credit, these are extremely powerful)

    2.  A deduction taken on the lower half of the 1040 page 1. Take the deduction for half of the self employed tax you'll be paying on 1040 page 2 if you own a business or have other self employment income.  That is a deduction that lowers your AGI.  So is an IRA contribution for those who may need to save for retirement but work for a company that doesn't have a qualified plan in which employees can contribute. Let's examine a very powerful deduction (for the lower income earner) - that IRA contribution (or other qualified plan contribution) could potentially yield a 'Saver' credit on Form 8880.  Beyond powerful and one of the better credits out there, if you qualify of course.

    3.  Then, there are itemized deductions, the weaker of the bunch - because they do not reduce your AGI. Mortgage interest, property taxes and state income tax.  Charitable giving, and subject to AGI limitations some job expenses (union dues) and medical expenses.

 

Very simplified look at the difference between credits and deductions, simplified because the tax code is just absolutely beyond comprehension unless you make a career of it.  I for one would like to see simplification and equalization between 'investment' and 'earned' tax rates.

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