The Ernst and Young Tax Guide for 2012 listed 50 of the most easily overlooked deductions. You may want to purchase this large book or look at what is listed on their website. Also see IRS.gov for a list of highlights and Whats Hot. My list will touch on a few of them that I often see. Remember – some of these deductions are phased out due to income, circumstance or “floor” limits required. Check with your tax professional to see if these or others are applicable to you.
- Be aware of AMT – the Alternative Minimum Tax: AMT affects more people now than ever, and sneaks up and surprises many people with large tax bills. The alternative minimum tax (AMT) attempts to prevent some who benefit from tax savings (deductions and credits) by making sure they pay a minimum tax. For middle Americans, the most typical cause of AMT tax is the level or amount of State, Local and Property Tax combined with miscellaneous deductions like unreimbursed employee costs; especially if your household income is over $100,000. You can see if the AMT affects you by consulting the AMT worksheet in the Form 1040 instructions. People with more complex financial situations should probably consult a good accountant to help them calculate what they might owe.
- Higher Education Expense Deductions and Credits: You may be able deduct $2,000 or $4,000 of qualifying tuition expenses, depending on your income. It applies to expenses for post-high school education for you, your spouse, or your dependents regardless if you had to take out loans to pay for the cost. It even counts for Grandma to pay for grandson’s college! Grandma can get the deduction. The Hope Credit or the Lifetime Learning Credit have stricter income limits than higher education deductions to qualify, but provide greater tax savings because they reduce your taxes dollar for dollar. Because both of these types of educational deductions and credits are dependent upon income levels, year in school, and many other factors, it’s not an easy choice which one is right for your case. Run all the scenarios or consult your tax advisor for the best treatment.
- Medical expense deductions: To be able to deduct qualifying medical expenses you must itemize and expenses are deductible only to the extent they exceed 7.5% of your adjusted gross income (AGI). Given the high rate of health care inflation, more people are eligible for this than in years past. Be sure to keep records of all medical expenses to see if you qualify each year.
- Reinvested stock dividends: This is a tip to avoid double taxation. When mutual fund and qualified stocks pay dividends to investors they are taxed in that year, whether or not those dividend monies were paid out to you in cash or reinvested. Most investors automatically re-invest them in additional shares. When you own investments, keep all of your statements. When an investor subsequently sells qualified shares of stock or the mutual fund, they are taxed on their gain. Meaning if you invested $9,500 and it grew to $12,000, $2,500 could be subject to tax in that year. However let’s assume that $9,500 generated $500 worth of dividends that were reinvested only $2,000 would be subject to tax. Many people do not keep good records and end up paying unnecessary tax. Many mutual fund companies will provide you with records if you do not have them. Each year when your broker “sells” stocks, a 1099-Div will be generated. You will need to compare the cost basis of these stocks against their sale price less commission in order to truly know how much gain to include in your taxable income.
- Donations and out-of-pocket expenses for charities and not for profits: You can write off donations to and out-of-pocket costs you incur while doing good works for nonprofit organizations such as churches, food pantries and schools. Keep records of item or cash given, purchased and costs incurred, such as miles driven. Many people give and don’t keep good records and loose good source of deductions:
- Child care credit: You may be eligible for the child care tax credit up to 35% of your qualifying expenses (depending upon your income) you paid someone to care for your child (under age 13) or dependents unable to care for themselves (because of physical or mental reasons) while you work or look for work. You may use up to $3,000 of the expenses paid in a year for one qualifying individual, or $6,000 for two or more qualifying individuals. If you have a tax-favored reimbursement plan at work, you can pay up to $5,000 of work related child care expenses. If you max-out the $5,000 through work but spend more, you may be eligible for an additional $1,000.
- Estate tax on income in respect of a decedent. Did you inherit an IRA or other ‘income in respect of a decedent,’ or IRD? Secondly, was their estate large enough that it was subject to federal estate tax? If so, you may be eligible for a deduction for the amount of estate tax paid on the IRD assets.
- Self employment business expenses: If you had any expenses related to self employment, be sure to keep good records. See your accountant and read books like Sandy Botkin’s for more information.
- Miscellaneous deductions: See http://www.irs.gov/publications/p17/ch28.html for a list of some that you might have missed.