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

Every year come April 15 (or the 16^th) 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.

***

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!

10 Tax Tips so April 15th won’t be so scary.

Taxes?  April 15th?  But it’s only February; the ink isn’t even dry on our New Year’s Eve invites and we’re ramping up for Valentine’s Day – why are you talking about taxes, already?  Good question, but the reality is far too many people ignore their obligations to the IRS until the second week in April.  By then, every CPA and tax preparer from Sarasota to San Francisco is pulling their hair out and sleeping in the office, living on strong coffee and dreams of a tropical vacation in May.  In fact, 11 out of 10 tax professionals (that's not a misprint) recommend putting some thought, planning, and organization into your taxes as early as possible.

Here are some general tips to help you get started so it won’t hurt too much in the month of April showers.  We should note that we are not CPA’s (nor do we play them on TV) and this is just general information, not professional advice.  Consult with your preparer because the rules and laws change to the tune of hundreds of pages of updates every year!

1. File Early.
Why wait?  Maybe you’re hesitant to file because you may have a big tax bill to pay, but the worst thing you can do is dodge the big deadline.  Even if you file and send in only $1 or request a payment plan, by filing early you’ll avoid the big rush, not to mention late fees.  Roughly 25% of taxpayers owe money but no matter how early you file that money still isn’t due until April 18th.  Conversely, about 75% of filers receive a refund, with the average check about $3,000, so if you file early (and electronically) your check will be in the mail while others are still stressing.

2. Think long and hard about E-Filing.  Then just do it.
Too many people still opt to file manually, whether with their CPA or by themselves, but e-filing is a far more convenient and error proofed process.  You’ll save trees, get your return much faster – EF returns are accepted by the IRS with next day service once submitted - and here’s another secret we’ll cover in detail: they’re rarely ever reviewed by a live IRS agent for audit!

3. Think “E” to avoid the “A” word.
Not many people know that manual (or paper) returns have an average 20% error rate, while e-file returns only have about 1% incorrections!  The biggest problem the IRS has is basic math that doesn’t add up on returns, a problem that occurs 99% on manual returns because e-filing software has automatic checks and balances.

The other biggest reason for audits is mistakes made by…the IRS!  That’s right, each year Uncle Sam’s tax squad receives about 100 million returns.  To handle the workload they hire legions of inexperienced, minimum wage workers who literally file and organize paper returns manually with a system of tables, slots, and stamps.  From there your return gets entered manually by a heavy-lidded, unmotivated temporary worker, so you could image how many errors occur in the archaic process.

4. Got big life changes?
If you’ve recently had a baby, gotten married, lost a job, are caring for elder parents, gone through a divorce, or bought or sold a house, there probably are significant tax implications.  Don’t forget to you’re your CPA about these big moves proactively, as they will strategize your tax picture accordingly and you’ll probably be eligible for new deductions.  Whether it’s the $1,000 Child Care Credit, Head of Household status, or Mortgage Interest Deduction, big life events almost always have tax implications.

5. Brainstorm your business expenses.
Too often, people leave legitimate business expenses off of their returns.  If you spend money on just about anything that’s critical to your job, it could qualify as a business expense.  Recently, an exotic dancer even won a case against the IRS allowing her to write off her breast implants!  So think of that as the barometer for business expenses and I bet you’ll add a few things to the list.

6. Find a quality tax preparer, not a cheap one.
In my humble opinion, there are things you want to skimp and save money on, and things you don’t.  Brain surgery, parachutes, and a good tax preparer are three things I can think of off the top of my head where quality matters more than price.  I recommend avoiding the seasonal shops that hire temporary workers and then close after tax time.  You know the ones with the big name and fancy television commercials?  What happens if you have a question after they close up…or you get audited?  You’ll be on your own.  Find a great tax professional who hopefully is a CPA and form a long-term relationship with them – the results will save you far more than the few bucks you might (you probably won’t) save with a cut-rate tax shop.

7. Business expenses and your Schedule C.
A word of caution about those who file a Schedule C form for business expenses; the IRS carefully reviews these.  If your itemized deductions are larger than average for most people at your income level, you could trigger a second look…or audit.  For that reason, be extra careful with home office and rental property deductions.

8. Charity is about giving back - but you may get, too.
Giving back is a wonderful thing to do, but don’t forget that you may see a benefit once tax time rolls around.  However, to take advantage of the charitable donations you’ve made, you’ll have to carefully track your noncash contributions.  Whenever you give or drop off a bag at Goodwill, for example, make sure to get a receipt and carefully fill it out with exactly what goods or monetary value was transferred.  Don’t forget about the donations you made online or through PayPal, etc.  Save your receipts and print out confirmations or written records and keep them in one folder.  However, remember that you only charities qualified with the IRS are eligible for tax deductions, so check the IRS.gov website or ask your professional.

9. Contribute to retirement accounts.
If you want to gain a tax deduction on this year’s taxes for funding your qualified retirement account, like a 401K or similar plan, you’ll have to do it before December 31st.  But you still have until April 15th to set up a new IRA or add money to your established IRA.

10. Maximize your Home Office Deduction.
Definitely take advantage of every legitimate expense from your home office when it comes time to file your taxes, but also be careful.  According to tax law, your home office is only eligible only if it is “exclusively and regularly” used for business purposes.  That means square footage from your dining room table or the computer workstation in your bedroom won’t count.  Consult with your tax professional to see what you need to make the most out of this deduction but don’t get too aggressive.