Tax and Financial News for January 2013

rss feed

Commonly Overlooked Tax Deductions and Credits

No one wants to pay more in taxes than required. But every year, taxpayers miss out on some common tax deductions and credits simply because they are not aware of them. Even people who use tax preparation software packages fail to take advantage of these tax-saving items because they are too confusing to input or they are erroneously disqualified by the system. Bottom line: many Americans pay more in taxes than legally obligated. Don’t let this happen to you. As you work through this year’s tax return, be aware of the some of the most commonly overlooked tax deductions and credits.

One of the most valuable federal tax deductions actually expired at the end of 2011, but it was finally restored retroactively for 2012 by the American Taxpayer Relief Act, which was just passed on Jan. 1. The deduction for state sales taxes often seems overly cumbersome to deal with when preparing your taxes, but it can provide significant savings, especially in states with no income tax. The IRS allows taxpayers to choose between deducting state income taxes paid and state sales taxes paid. Taxpayers can either save all their receipts and add up the amount of sales tax paid during the year or use IRS tables that are based on income and state of residence to determine the standard amount that is deductible. In addition, people who claim the state sales tax deduction do not have to include a state tax refund in income the following year. As a result, if your sales tax deduction is about the same as your state income tax deduction, the sales tax deduction will probably yield greater savings. This deduction is now scheduled to expire at the end of 2013.

Many people incurred expenses searching for a job in 2012. Both job-hunting costs and moving expenses are commonly overlooked deductions. If you were looking for employment in the same line of work, you can deduct transportation expenses, food and lodging for overnight stays, employment agency fees, and the cost of printing resumes and business cards. If you moved your residence at least 50 miles away from your old home for the purpose of work, moving expenses are deductible even if you do not itemize your deductions. If you were looking for your first job, moving expenses are deductible but job-hunting costs are not.

For students, student loan interest paid by your parents is deductible. The IRS treats the interest as money given to the child, so children who are not claimed as dependents on their parents’ tax return can deduct up to $2,500 of interest paid by their parents, and the student does not have to itemize deductions to get the benefit. Parents cannot claim the deduction because they are not legally liable for the debt.

Many of the energy-saving home improvement tax credits were extended by the American Taxpayer Relief Act as well. Credits that expired at the end of 2011 for the installation of energy-efficient windows, doors, skylights, water heaters, furnaces and boilers have been extended through 2013. In addition, taxpayers can receive a credit for 30 percent of the cost (including labor) of installing qualified residential alternative energy equipment through 2016 with no dollar limit. These items include solar water heaters, geothermal heat pumps and wind turbines.

For the self-employed, health insurance premiums are deductible if you made a profit from your business during the year. Although disability insurance premiums for lost earnings are no longer deductible, overhead insurance that pays for business overhead expenses during disability is deductible. These items are often overlooked, but they can make a significant difference in the bottom line.

Educator expenses are also deductible for teachers. Teachers who pay out-of-pocket for classroom materials can deduct as much as $250; and again, they do not need to itemize their deductions to take advantage of this provision. The American Taxpayer Relief Act extended this deduction through 2013.

Many people do not realize the significant tax savings that the child care credit can produce. Depending on the amount of income, 20 percent to 35 percent of child care expenses can be used as a tax credit for amounts paid for child care while you work. This credit was permanently extended by the American Taxpayer Relief Act.

All of these tax deductions and credits are subject to detailed IRS regulations, so be sure to research the specifics before claiming them. The American Taxpayer Relief Act made significant changes to the tax code. Consult a tax professional to help you navigate this complex field and realize the largest amount of tax savings possible. And don’t forget – any fees paid for tax preparation services are deductible, too.


Contact Us for More Information


Copyright (c) 2003.Tidewater Accounting and Business Services. All rights reserved.