Every year, the IRS reports the most common blunders that taxpayers make on
their returns. Every year, at or near the top of the â€œoopsâ€ list is forgetting
to enter their Social Security number correctly on the tax form, or forgetting
No doubt about it: The opportunity to make mistakes is
almost unlimited, and missed deductions can be the most costly. Tax time is a
dangerous time and it can be easy to miss a trick and pay too much.Â In the IRS and professional tax auditing
circles, it is a known fact that millions of taxpayers overpay their taxes
every year by overlooking just one of the money-savers listed below:
1. State sales taxes. Although all taxpayers have a shot at this
write-off, which has recently been extended through 2011, it makes sense
primarily for those who live in states that do not impose an income tax. You
must choose between deducting state and local income taxes or state and local
sales taxes. For most citizens of income-tax states, the income tax is a bigger
burden than the sales tax, so the income-tax deduction is a better deal.
The IRS has tables that show how much residents of various states can
deduct. But the tables arenâ€™t the last word. If you purchased a vehicle, boat
or airplane, you get to add the state sales tax you paid to the amount shown in
the IRS tables for your state, to the extent that the sales-tax rate you paid
doesnâ€™t exceed the stateâ€™s general sales-tax rate.
The same goes for any home building materials you purchased. These add-on
items are easy to overlook, but they could make the sales-tax deduction a
better deal even if you live in a state with an income tax. The IRS even has a
calculator on its Web site to help you figure the deduction, which varies
depending on the state where you live and your income level.
2. Reinvested dividends. This isn't really a tax deduction, but it is
an important subtraction that can save you a bundle. And this is the break 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 you receive them and later when theyâ€™re included in the proceeds of the
sale. Donâ€™t make that costly mistake. If youâ€™re not sure what your basis is,
ask the fund for help.
3. Out-of-pocket charitable contributions. Itâ€™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 good works. For example,
ingredients for casseroles you prepare for a nonprofit organizationâ€™s soup
kitchen and stamps you buy for your schoolâ€™s fund raising mailing count as a
charitable contribution. Keep your receipts and if your contribution totals
more than $250, youâ€™ll need an acknowledgment from the charity documenting the
services you provided. If you drove your car for charity in 2010, remember to
deduct 14 cents per mile.
4. Student-loan interest paid by Mom and Dad. Generally, you can only
deduct mortgage or student-loan interest if you are legally required to repay
the debt. But if parents pay back a childâ€™s student loans, the IRS treats the
money as if it was given to the child, who then paid the debt. So, a child
whoâ€™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 doesnâ€™t have to
itemize to use this money-saver. Mom and Dad also donâ€™t get the interest
deduction since they were not liable on the debt.
5. Job-hunting costs. If youâ€™re among the millions of unemployed
Americans who were looking for a job in 2010, keep track of your job-search
expenses. If youâ€™re looking for a position in the same line of work, you can
deduct job-hunting costs as miscellaneous expenses if you itemize, but only to
the extent that the total of your total miscellaneous itemized deductions
exceed 2% of your adjusted gross income. Job-hunting expenses incurred while
looking for your first job donâ€™t qualify. Deductible job-search costs include,
but arenâ€™t limited to --
â€¢ Food, lodging and transportation if your search takes you away from home
â€¢ Cab fares
â€¢ Employment agency fees
â€¢ Costs of printing resumes, business cards, postage, and advertising
6. Moving expenses to take your first job. As we just mentioned,
job-hunting expenses incurred while looking for your first job are not
deductible. But, moving expenses to get to that position 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, including 16 Â½ cents per mile for
driving your own vehicle for a 2010 move, plus parking fees and tolls.
7. Health insurance deduction to reduce self-employment tax. Business
owners have always been allowed to deduct health insurance premiums for
themselves and their family in computing adjusted gross income on the front page of Form 1040. For 2010, they can also deduct the cost of those health
insurance premiums in calculating self-employment tax on Schedule SE.
The IRS has hidden this write-off on line 3 of Schedule SE. On that line,
you are told to add your self-employment income from lines 1 and 2, subtract
the amount claimed on line 29 of Form 1040 (your health insurance premiums) and
enter the net amount on line 3. Since the write-off is not on a separate line
and is not clearly identified, it will be far too easy for many self-employed
persons to miss unless you are fully aware of this tax break and are looking
8. Child-care credit. A 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 thatâ€™s
subject to tax.
If you pay your child-care bills through a reimbursement account at work,
it's easy to overlook the child-care credit. 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.
9. State tax paid last spring. Did you owe tax when you filed your
2009 state income tax return in the spring of 2010? Then, for goodnessâ€™ sake,
remember to include that amount in your state-tax deduction on your 2010
return, along with state income taxes withheld from your paychecks or paid via
quarterly estimated payments.
10. Refinancing points. When you buy a house, you get to deduct in
one fell swoop the points paid to get your mortgage. When you refinance a
mortgage, though, you have to deduct the points over the life of the loan. That
means you can deduct but
donâ€™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 in one fell swoop all of the
as-yet-undeducted points. Thereâ€™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.
11. American Opportunity Credit. This tax credit, which has been
extended through 2012, is available for up to $2,500 of college tuition and
related expenses paid during the year. 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. This credit is juicier than the
old Hope credit â€“ it has higher income limits and bigger tax breaks, and it
covers all four years of college. And if the credit exceeds your tax liability
(regular and AMT), it is partially refundable.
12. Making Work Pay credit. Youâ€™ve probably been enjoying the fruits
of this credit via reduced payroll tax withholding throughout the year. But to
lock in your savingsâ€“by reducing your tax bill by $400 if youâ€™re single or $800
if youâ€™re married and file a joint returnâ€“youâ€™ll need to actually claim the
credit on your 2010 tax returnâ€”and youâ€™ll use Schedule M to do so. The credit
is equal to 6.2% of your earned income, capped at $400 or $800. For single
filers, it starts phasing out at $75,000 of adjusted gross income and dries up
at $95,000. The phase-out zone for couples is $150,000 to $190,000.
13. Credit for energy-saving home improvements. You can claim a tax
credit equal to 30% of the cost of energy-saving home improvements up to a
maximum of $1,500. This cap applies to both 2009 and 2010 combined, so if you
claimed the maximum $1,500 in 2009, you donâ€™t get another crack at it for 2010.
The credit applies to biomass fuel stoves, qualifying skylights, windows and
outside doors, and high-efficiency furnaces, water heaters and central air
conditioners. For 2011, this credit goes back to pre-2009 limits (for example,
$500 maximum credit for all years with no more than $200 for windows).
Thereâ€™s also no dollar limit on the separate credit for homeowners who
install qualified residential alternative energy equipment, such as solar hot
water heaters, geothermal heat pumps and wind turbines. Your credit can be 30%
of the total cost (including labor) of such systems installed through 2016.
Be informed and ready this year when you file your taxes and do check with a
tax professional on your status before you get started. Â For more information on current tax credits
and allowable deductions visit www.irs.gov.
When you are in the market for a new home, contact www.Century21judgefite.com - 800-451-8055 to get assistance from one of our qualified Real Estate Professionals.Â CENTURY 21 Judge Fite Company isÂ Smarter. BOLDER. Faster.