Don’t Overlook These 6 Tax Deductions
No one likes leaving money on the table -- especially when it comes to dealing with the IRS.
According to Jackie Perlman, senior analyst with The Tax Institute at H&R Block, many taxpayers choose to take the standard deduction instead of itemizing because they wrongfully assume it won’t be worth their time.
“Many people believe they can’t or shouldn’t itemize, but they need to do the math. Most of the time, the deductions add up to much more then they think,” she says.
Some filers also think itemizing will increase their chances of being audited, which Perlman says could mean leaving money on the table. “There is some higher risk with itemizing that you will be audited, but the whole percentage of people being audited is pretty small. And as long as you have receipts and substantiations you will be fine."
According to H&R Block (NYSE:HRB), about 1 in 5 people who completed their taxes on their own left an average amount of $450 in unclaimed money.
Here are six commonly overlooked tax breaks for itemizers:
Child Dependent Care Credit. Millions of parents rely on child care when they are at work, which doesn’t come cheap. Thankfully, there is a credit for expenses (generally a percentage of the amount of work-related expenses) for the care of a qualified dependent.
“This is a tricky credit; it's done on a sliding scale from 35% to 20% of those expenses to get a credit on your return. It’s complicated, which is why some parents skip it,” says Perlman.
Keep in mind that this tax break also applies to summer camp. “If you send kids to summer day camp so you or your spouse can work, you can deduct that, up to 35% if you have two children,” says Lisa Greene-Lewis, CPA and tax expert for TurboTax.
Sales Tax Deduction. If you live in a state that does not collect income tax (there are currently seven), you can deduct sales tax you’ve paid over the tax year, which can bring significant savings on big-ticket items.
“If you made big purchases like a car or a new home appliance, you can deduct that,” says Perlman.
Earned Income Tax Credit. This credit is applied to low to moderate income filers and can be worth up to $6,044.
“This credit can be huge since it can be a big percentage of their income. Your eligibility is based on income, amount of children and marital status,” says Greene-Lewis.
According to the Tax Policy Center, the credit amount equals a fixed percentage of income from the first dollar of earnings until the credit’s limit. The percentage and the maximum credit depends on the number of children. Families with three or more children may receive a credit of up to $6,044 in 2013, $5,372 for families with two children, $3,250 for families with one child and $487 for childless filers.
Lifetime Learning Credit. Older filers often wrongly assume that tax breaks regarding higher education only apply to college-age students.
“If you decide to go to graduate school or take some education courses to enhance your skills, as long as it’s from an accredited institution, you can claim the lifetime learning credit,” says Perlman.
The credit can be worth up $2,000 for qualified education expenses paid for all eligible students. “To get that full amount, you need to be paying tuition up to $10,000 a year, but even if you aren’t paying that much you will still get something. You don’t have to be a 20-year-old undergrad,” she says.
Mortgage Points. Most homeowners are aware the interest on their mortgage can be deducted, but Greene-Lewis says many overlook deducting their mortgage points.
“If you purchased a house and paid points, you can deduct all of it,” she says. “If you refinanced, you can still deduct the points, but it’s divided up over the life of the loan.”
However, if the acquisition debt is more than $1 million or your home equity debt exceeds $100,000, you cannot deduct all your points.
Job Search Costs. Any costs incurred during your job hunt, including resume preparation, travel for interviews, career coaching and use of outplacement agencies are deductible as long as you itemize.
“If it directly relates to you trying to get employed in your current field you can deduct it,” says Greene-Lewis.
Keep in mind that in addition to other miscellaneous itemized expenses, job-search costs must exceed 2% of your adjusted gross income before they produce any tax savings.