7 Commonly Overlooked Tax Deductions
Come tax time, everyone is looking for a way to lower the amount of taxes they owe. It reminds me of an old episode of The Cosby Show where Cliff is trying to justify that every purchase they made for a given year should be considered a tax deduction. He even goes to talk about how he should get more money because of what he has to put up with in regards to his children. It was a great episode. In this post, I am going to highlight seven commonly overlooked tax deductions. Make sure you review the list before filing your taxes so that you don’t miss out on claiming any one of them.
Photo Courtesy: Stuart Miles
Commonly Overlooked Tax Deductions
- State Sales Tax.
Most people thought or still think that this itemized deduction expired. It actually did at the end of 2011. But on January 1, 2013 it was retroactively put back into effect for the 2012 tax year by Congress.
This deduction allows you to deduct state income taxes paid or state sales taxes you paid, whichever one gives you a larger deduction. If the state you live in does not have a sales tax, then your deduction is limited to sales tax paid. The IRS has a calculator on its website to help you determine how much sales tax you paid, but as of this writing, is still not updated for 2012.
- Charitable Deductions.
Most readers know that you can deduct charitable gifts on your taxes. What I am talking about here are the smaller charitable gifts you made that you might overlook. Think about when you are at the grocery store and the cashier asks if you want to donate $1 to a certain organization. While $1 doesn’t seem like much, when you think about all of the one-off times you made a donation in the year, it could add up to a sizable amount.
Be sure also to take into account everything related to charity. Did you make a meal for a soup kitchen? If so, the purchasing of the ingredients can be written off. As can mileage if you used your car for charity during the year. You can deduct $0.14 per mile driven plus the cost of tolls and parking.
- Job-Hunting Expenses.
If you areunemployed and looking for work, you can deduct some of the cost of looking for a new job in the same field of work. To be able to claim the deduction, the expenses must total 2% or more of your adjusted gross income. Be sure to review what is and is not allowed to be deducted when it comes to job-hunting expenses. These change all of the time and some that you wouldn’t think are allowed to be deducted can be and others that you think would be allowed are not.
Note to those looking for their first job, your job-hunting expenses are not allowed as a deduction.
- Child Care Credit.
Depending on your income, you can qualify for expenses you pay for child care while you work. Generally, you can deduct between 20%-35% of what you pay for child care. What makes this even better is that this is a credit and not a deduction. This means you get a dollar-for-dollar match to reduce your income tax as opposed to a deduction which is only worth your underlying tax bracket.
- Jury Pay Paid to Employer.
Many employers still pay you your wages when you are out on jury duty. The only caveat is that when you receive your pay from serving on the jury, you must turn that check over to your employer. Seems innocent enough, but the problem is that you are required to include jury duty pay on your taxes. Because you paid your employer your jury duty check, you can deduct the amount you give to your employer.
- Baggage Fees.
Paying those annoying baggage fees when you fly irritates most everyone. If you are self-employed and are flying for business, be sure to include these fees to your deductible travel expense file.
- Reinvested Dividends.
This one is a little misleading as you cannot really deduct reinvested dividends on your taxes. However, if you do reinvest your dividends, know that each reinvestment increases your cost basis. This reduces your taxable capital gain when you sell shares. If you do not account for the reinvested dividends in your calculations, you will be hit with paying tax twice: first when the dividend was paid to you, and again when you go and sell the investment.
Beginning in 2012, the IRS requires mutual funds to track the cost basis for you. However, this is only for transactions that occur in 2012 and beyond. Any shares that you bought or reinvested prior to 2012 you have to continue to track on your own. So it is best to make sure that you have correct information regarding your cost basis when it comes to reinvested dividends.
If you need help with this, be sure to reach out to your mutual fund company. I know for me a few years back I needed cost basis information and my mutual fund company sent me a printout of all of my purchases, sales and reinvested dividends. It was truly a life saver when it came time to file my taxes.
With the tax law changing every year and the fact that Congress implements new tax laws at the last minute (and can retroactively make expired laws relevant again) it’s critical to stay on top of the latest tax news. Your best bet is to either hire a CPA that you know stays up on the latest tax news or if you file your taxes yourself using a software program like TurboTax, to make sure that it is always up to date. If you calculate your taxes on your own, make sure to read any tax news so that you are up to date on what you can and cannot deduct. Doing so will ensure that you pay only what you are required to pay.
Are there any other tax deductions that you think most people overlook?