Friday, March 11, 2016

Are you overpaying on your taxes? Try these 10 most underutilized income tax deductions.

Every year come April 15 (or the 16th) Americans owe approximately $1.4 trillion in income taxes to the IRS. While that’s a lot of coin, did you know that the average U.S. citizen only plays an actual income tax rate of 10.1 percent? That’s the revelation of a study by the U.S. Congress’s Joint Committee on Taxation. If that number seems a little low compared to our higher standard tax brackets, it should highlight the fact that a lot of people are utilizing write-offs, deductions, and other tax shelter strategies to reduce their personal tax liability.

So if you’re paying higher than 10.1 percent or just want to see if you can save money, where should you get started? After all, the IRS tax codes for personal income span almost 12,000 pages over six volumes, which would take a lifetime for a regular person to read and decipher. And with codes, laws, and rules changing every year, the business of reducing tax liability is best left to the experts. But what we can encourage is for we - the hard working and tax-paying people - to take advantage of every legal and ethical deduction available. Here are the 10 most commonly overlooked personal income tax deductions (and of course, consult your CPA or tax professional for specifics).

1. Charitable Donations
Did you clean out your closet, garage, or attic and donate things to your local Goodwill or shelter this year? Or do you regularly tithe or donate at your church, mosque, or temple? If so, you are entitled to take a deduction for charitable contributions – but only to qualified organizations (not individuals) and for monetary gifts up to $250. You can even deduct the fair market value of any property or goods you donate!

2. Mileage Deductions
You may know by now that people who are self-employed can deduct a certain percentage of their mileage to and from work, but in fact, the IRS also allows mileage deductions for medical purposes, moving, and when doing service for a charity. If you drive a lot for any of these purposes, the savings could add up!

3. Energy Efficiency Tax Credits
If you invested in energy efficient products or home upgrades, there are a handful of great tax credits available for some. These include the Residential Energy Property Credit for a credit on energy-efficient doors, windows, insulation, roofing, heating and cooling systems, the Residential Energy Efficient Property Credit, Plug-in Electric Vehicle Credit, Credit for Conversion Kits, and the Treatment of Alternative Motor Vehicle Credit as a Personal Credit Allowed Against AMT.

4. New Vehicles Sales Tax Deduction
If you bought a new car this year, you may be entitled to a special tax deduction for the sales or excise taxes on that transaction. In the past, the deduction was for vehicle purchase prices up to $49,500, and even included some other fees or taxes imposed by the state or locality in certain cases. The rules on this deduction change frequently, so ask your tax pro!

5. State Tax Deduction
If you itemize your tax deductions on Schedule A of your tax forms, you can probably deduct either state and local income taxes or state and local general sales taxes. Even if you didn’t save your receipts (most of us don’t have receipts for every single purchase throughout the year!) you can opt to use a standard amount for your state.

6. Mortgage Deductions
If you paid “points” on your mortgage closing (charges paid to obtain a lower interest rate or pay closing costs or fees), these points can be deductible. These apply for a both a purchase loan and refinances, and are on top of the standard mortgage interest deduction homeowners enjoy.

7. Unemployment Deductions
Are you currently between jobs but actively looking for work? If that’s the case, you may be entitled to certain credits and deductions, such as the Earned Income Tax Credit, as well as deducting expenses related to your job search. These include employment agency fees, funds spent on resume preparation and post, and some travel expenses if the trip is taken primarily for a job search.

8. Tax Preparation Credit
Did you purchase software to file your own taxes (hopefully not!), or go to a Certified Public Accountant, Enrolled Agent, or other professional tax agency for tax preparation (much better)? Those fees may be fully deductible, even down to the convenience fees charged for the electronic payment of your taxes.

9. Parental Repayment of Student Loans
If parents are paying back their child’s student loan, the IRS considers this a gift to the child. So as long as the child is no longer claimed as a dependent, Mom or Dad can deduct up to $2,500 of student-loan interest they pay each year. That might make you rethink how you pay off your student loans!

10. Working Parents Credits
If you paid for the care of a qualifying individual (usually a child, but it could even be your spouse!) so you could either look for work or go to work, you can claim a credit for those expenses. Eligible costs include monies paid to a cook, maid, babysitter, housekeeper, or cleaning person, dependent care centers, elective pre-schools, before and after school programs, and day camps.

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We hope that learning about these most underutilized tax credits will help you at least ask more questions when you’re in your professional tax preparer’s office, and hopefully save some money!

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