A reader named Brandon recently wrote in to encourage me to write more about commonly missed income tax deductions. As it turns out, he dug up my article from last year and wound up saving $200 on the retirement tax credit that he would’ve otherwise missed. With that in mind, I thought I’d highlight this list of eleven commonly overlooked tax deductions from a recent issue of Kiplinger’s .
- State sales taxes. This one makes the most sense for people in states without an income tax, as you can choose between deducting your state sales tax and state income tax. Nonetheless, since you can use a tabled value to figure your deduction, it’s always a good idea to run it both ways.
- Reinvested dividends. While this isn’t technically a deduction, it’s a tax break that a lot of people miss out on. If you’ve been reinvesting dividends, the cost basis of your holdings are higher than you might otherwise think. This in turn reduces your capital gains (or increases your capital losses) when selling.
- Out-of-pocket charitable contributions. Keep track of mileage driven for charity, as well as all those smaller contributions you make throughout the year.
- Student loan interest paid by Mom and Dad. Since the IRS treats student loan repayments by parents as a gift to their child, students that aren’t claimed as dependents can actually deduct up to $2, 500 of the loan interest paid by their parents.
- Moving expense to take first job. Expenses related to finding your first job are not deductible, but your moving expenses are, even if you don’t itemize. As long as you move more than 50 miles, you can deduct the cost of getting yourself and your stuff to the new locale. You can even deduct mileage.
- Military reservists travel expenses. Members of the National Guard or military reserve can deduct travel expenses related to drills or meetings as long as they travel over 100 miles and are away overnight. The deduction covers the cost of lodging plus half the cost of your meals. You can also deduct mileage, parking fees, and tolls.
- Child-care credit. If you pay someone to take care of your kids such that you can work, you might qualify for a tax credit. Note that this is true even if you claim your childcare-related expenses through a tax-favored reimbursement account at work because such accounts are capped at $5, 000 while expenses up to $6, 000 can qualify for the credit.
- Estate tax on income in respect of a decedent. You can get an income-tax deduction for the amount of estate tax paid on an IRA the you inherit from someone else.
- State tax you paid last spring. If you owed state taxes when you filed your 2007 return, you can deduct that amount along with the state income taxes that were withheld during 2008.
- Refinancing points. Any points that you pay when you refinance can be deducted (on a monthly basis) over the life of the new loan. Moreover, all unamortized mortgage points left over from prior years are deducted all at once if you end up refinancing your mortgage in any particular year.
- Jury pay paid to employer. Some employers continue to pay their employees’ full salary when they’re on jury duty, but require that the employees turn over their jury pay. Since the IRS views this as taxable income, you need to be sure to deduct it. If you don’t, you’ll end up paying double taxes on a portion of your income.
Also be sure to check out my list of common income tax deductions. Keep in mind that these sorts of deductions not only reduce your tax liability, but could also keep you from slipping into the next higher income tax bracket. The last thing you want to do is pay too much in the way of taxes!