The thousands of pages in the U.S. tax code get more confusing each year, but the big question on most Americans' minds remains very simple: How can I reduce my taxable income? With tax season is in full swing, make tax deductions and tax credits your best friends for the next few months. Many people probably don't realize how many expenses are tax deductible, and don't want to spend hundreds of dollars hiring a CPA to figure it out.
If you're a seasoned tax filer, you don't ever overlook tax deductions like mortgage interest, student loan interest, real estate property taxes, and state taxes. Still, plenty of little-known tax deductions hide deep in the tax code, tricking you into leaving tax refund money on the table.
This list of commonly overlooked personal tax deductions will help beginners and experts alike discover major savings this tax year.
Family, Home, and Major Purchases
1. Dependent parents. More and more often, middle-aged people take care of their aging parents, including paying some or all of their medical expenses. If you're providing more than 50 percent of your parents' financial support, and their expenses exceed 7.5 percent of your adjusted gross income, you may qualify for a big deduction.
2. Mortgage loan discount and origination fees. If you bought a house in 2010, make sure you check your Good Faith Statement and deduct any mortgage origination fees or discount points that you paid. The IRS considers all of these expenses prepaid mortgage interest, and mortgage interest is always deductible for primary residences.
3. Sales tax on a new vehicle. This deduction comes with a lot of restrictions and stipulations--buying a used car doesn't count, for example--but if you purchased a new car in 2010, you may be able to deduct the sales tax on the purchase, even if you don't itemize your deductions. Depending on your filing status (i.e. single, married filing jointly versus married filing separately) and income, your deduction might be a little lower, and if you make more than $135,000, this deduction is not applicable.
4. Home energy efficiency improvements. If you make qualifying energy-efficient home improvements to your primary residence, like installing doors, windows, a water heater, furnace, or air conditioner, you may be able to deduct up to $1,500 off your 2010 tax bill. For more information, see this list of green energy tax credits.
Volunteering and Philanthropy
5. Mileage for volunteer work. If you travel a long way to volunteer for a charity, you can deduct the IRS-determined mileage allowance for your commute back and forth. While the reimbursement rate fell a bit for business expenses this year, fortunately the 14 cents per mile for charity-related travel held steady.
6. Childcare expenses when volunteering. If you paid a babysitter to watch the kids while you volunteered for your church or other non-profit organization, you can deduct that expense on your taxes.
7. Expenses for mentoring programs. Many volunteers for programs such as Big Brothers Big Sisters, Young Life, and youth groups end up spending a lot of their own funds on children by paying for meals and event tickets. You can't deduct the money you spent on yourself, but you can deduct the cash spent on the child.
Work and School
8. Business meals and entertainment. If you're a small-business owner or a self-employed freelancer who takes prospective or current clients out often, you're incurring a great deal of expenses for meals and entertainment. Make sure you keep these expenses separate, because you can deduct 100 percent of the cost of entertainment and 50 percent of what you spend on meals (since you need to eat anyway).
9. Continuing education deductions. If you itemize your deductions, don't miss out on these miscellaneous itemized tax deductions: Subscriptions to professional publications, dues paid to professional associations, investment advisory fees, costs of a safety deposit box, and tax-preparation fees (even if you used online tax preparation software like TurboTax).
10. Jury duty pay. If you received jury duty pay, the IRS considers it like any other taxable income. But if you had to return jury duty compensation because you still had a salary from your employer while at jury duty, then you can deduct the pay from your tax return.
You don't have to be a CPA or a math whiz to figure out that many activities, tasks, and everyday situations can be money-saving tax deductions. But of course fine print can always get in the way, so if you're unsure about itemizing or taking certain deductions, call me at 773-792-1910 or email me at mastertype@mabspc.com. The last thing you want to do is claim a deduction and pay it back later on during an audit.
What deductions have you found on previous tax returns or in getting ready to file this year?
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