Tax Resources & Links

The Most-Overlooked Tax Deductions

Years ago, the fellow who was running the IRS at the time told Kiplinger’s Personal Finance magazine that he figured millions of taxpayers overpaid their taxes every year by overlooking just one of the money-savers listed here.

We’ve added several new reminders this year and updated key details throughout this item for 2014.

State Sales Taxes

You may hear that this tax break expired . . . which it does regularly, only to be just as regularly revived by Congress.

That’s exactly what happened for purposes of 2014 returns. The break expired at the end of 2013 and then was revived retroactively in December 2014 to cover 2014 returns. And then it died again on December 31. Right now, we don’t know what the rule will before 2015. But for 2014 returns, the state sales tax deduction option is alive and well. This is particularly important to you if you live in a state that does not impose a state income tax. You see, Congress offers itemizers the choice between deducting the state income taxes or state sales taxes they paid. You choose whichever gives you the largest deduction. So if your state doesn’t have an income tax, the sales tax write-off is clearly the way to go.

In some cases, even filers who pay state income taxes can come out ahead with the sales tax choice. The IRS has tables that show how much residents of various states can deduct, based on their income and state and local sales tax rates. But the tables aren’t the last word. If you purchased a vehicle, boat or airplane, you may add the sales tax you paid on that big-ticket item to the amount shown in the IRS table for your state. The IRS even has an online calculator that shows how much residents of various states can deduct, based on their income and state and local sales tax rates.

Reinvested Dividends

This isn’t a tax deduction, but it is an important subtraction that can save you a bundle. And former IRS commissioner Fred Goldberg told Kiplinger that missing this break costs millions of taxpayers a lot in overpaid taxes.

If, like most investors, you have mutual fund dividends automatically used to buy extra shares, remember that each reinvestment increases your tax basis in the fund. That, in turn, reduces the taxable capital gain (or increases the tax-saving loss) when you redeem shares. Forgetting to include reinvested dividends in your basis results in double taxation of the dividends–once in the year when they were paid out and immediately reinvested and later when they’re included in the proceeds of the sale.

Don’t make that costly mistake.

If you’re not sure what your basis is, ask the fund for help. Funds often report to investors the tax basis of shares redeemed during the year. In fact, for the sale of shares purchased in 2012 and later years, funds must report the basis to investors and to the IRS.

Out-of-Pocket Charitable Contributions

It’s hard to overlook the big charitable gifts you made during the year, by check or payroll deduction (check your December pay stub).

But little things add up, too, and you can write off out-of-pocket costs incurred while doing work for a charity. For example, ingredients for casseroles you prepare for a nonprofit organization’s soup kitchen and stamps you buy for a school’s fund-raising mailing count as charitable contributions. Keep your receipts. If your contribution totals more than $250, you’ll also need an acknowledgement from the charity documenting the support you provided. If you drove your car for charity in 2014, remember to deduct 14 cents per mile, plus parking and tolls paid, in your philanthropic journeys.

Job-Hunting Costs

If you’re among the millions of unemployed Americans who were looking for a job in 2014, we hope you were successful . . . and that you kept track of your job-search expenses or can reconstruct them. If you were looking for a position in the same line of work as your current or most recent job, you can deduct job-hunting costs as miscellaneous expenses if you itemize. Qualifying expenses can be written off even if you didn’t land a new job. But such expenses can be deducted only to the extent that your total miscellaneous expenses exceed 2% of your adjusted gross income. (Job-hunting expenses incurred while looking for your first job don’t qualify.) Deductible costs include, but aren’t limited to:

Transportation expenses incurred as part of the job search, including 56 cents a mile for driving your own car plus parking and tolls
Food and lodging expenses if your search takes you away from home overnight
Cab fares
Employment agency fees
Costs of printing resumes, business cards, postage, and advertising.

Military Reservists’ Travel Expenses

Members of the National Guard or military reserve may write off the cost of travel to drills or meetings. To qualify, you must travel more than 100 miles from home and be away from home overnight. If you qualify, you can deduct the cost of lodging and half the cost of your meals, plus an allowance for driving your own car to get to and from drills. For 2014 travel, the rate is 56 cents a mile, plus what you paid for parking fees and tolls. You may claim this deduction even if you use the standard deduction rather than itemizing.

Deduction of Medicare Premiums for the Self-Employed

Folks who continue to run their own businesses after qualifying for Medicare can deduct the premiums they pay for Medicare Part B and Medicare Part D, plus the cost of supplemental Medicare (medigap) policies or the cost of a Medicare Advantage plan. This deduction is available whether or not you itemize and is not subject to the 7.5% of AGI test that applies to itemized medical expenses. One caveat: You can’t claim this deduction if you are eligible to be covered under an employer-subsidized health plan offered by either your employer (if you have a job as well as your business) or your spouse’s employer (if he or she has a job that offers family medical coverage).

Child-Care Credit

A credit is so much better than a deduction; it reduces your tax bill dollar for dollar. So missing one is even more painful than missing a deduction that simply reduces the amount of income that’s subject to tax. In the 25% bracket, each dollar of deductions is worth a quarter; each dollar of credits is worth a greenback.

You can qualify for a tax credit worth between 20% and 35% of what you pay for child care while you work. But if your boss offers a child care reimbursement account–which allows you to pay for the child care with pretax dollars–that’s likely to be an even better deal. If you qualify for a 20% credit but are in the 25% tax bracket, for example, the reimbursement plan is the way to go. (In any case, only amounts paid for the care of children younger than age 13 count.)

You can’t double dip. Expenses paid through a plan can’t also be used to generate the tax credit. But get this: Although only $5,000 in expenses can be paid through a tax-favored reimbursement account, up to $6,000 for the care of two or more children can qualify for the credit. So if you run the maximum through a plan at work but spend even more for work-related child care, you can claim the credit on as much as $1,000 of additional expenses. That would cut your tax bill by at least $200.

Estate Tax on Income in Respect of a Decedent

This sounds complicated, but it can save you a lot of money if you inherited an IRA from someone whose estate was big enough to be subject to the federal estate tax.

Basically, you get an income-tax deduction for the amount of estate tax paid on the IRA assets you received. Let’s say you inherited a $100,000 IRA, and the fact that the money was included in your benefactor’s estate added $40,000 to the estate-tax bill. You get to deduct that $40,000 on your tax returns as you withdraw the money from the IRA. If you withdraw $50,000 in one year, for example, you get to claim a $20,000 itemized deduction on Schedule A. That would save you $5,600 in the 28% bracket.

State Tax Paid Last Spring

Did you owe tax when you filed your 2013 state income tax return in the spring of 2014? Then, for goodness’ sake, remember to include that amount in your state-tax deduction on your 2014 federal return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments during the year.

Refinancing points

When you buy a house, you get to deduct in one fell swoop the points paid to get your mortgage. When you refinance, though, you have to deduct the points on the new loan over the life of that loan. That means you can deduct 1/30th of the points a year if it’s a 30-year mortgage. That’s $33 a year for each $1,000 of points you paid–not much, maybe, but don’t throw it away.

Even more important, in the year you pay off the loan–because you sell the house or refinance again–you get to deduct all as-yet-undeducted points. There’s one exception to this sweet rule: If you refinance a refinanced loan with the same lender, you add the points paid on the latest deal to the leftovers from the previous refinancing, then deduct that amount gradually over the life of the new loan. A pain? Yes, but at least you’ll be compensated for the hassle.

Jury Pay Turned Over To Your Employer

Many employers continue to pay employees’ full salary while they serve on jury duty, and some impose a quid pro quo: The employees have to turn over their jury pay to the company coffers. The only problem is that the IRS demands that you report those jury fees as taxable income. To even things out, you get to deduct the amount you give to your employer.

But how do you do it? There’s no line on the Form 1040 labeled “jury fees.” Instead, the write-off goes on line 36, which purports to be for simply totaling up deductions that get their own lines. Add your jury fees to the total of your other write-offs and write “jury pay” on the dotted line.

American Opportunity Credit

Unlike the Hope Credit that this one replaced, the American Opportunity Credit is good for all four years of college, not just the first two. Don’t shortchange yourself by missing this critical difference. This tax credit is based on 100% of the first $2,000 spent on qualifying college expenses and 25% of the next $2,000 … for a maximum annual credit per student of $2,500. The full credit is available to individuals whose modified adjusted gross income is $80,000 or less ($160,000 or less for married couples filing a joint return). The credit is phased out for taxpayers with incomes above those levels. If the credit exceeds your tax liability, it can trigger a refund. (Most credits are “nonrefundable,” meaning they can reduce your tax to $0, but not get you a check from the IRS.)

College credits aren’t just for youngsters, nor are they limited to just the first four years of college. The Lifetime Learning credit can be claimed for any number of years and can be used to offset the cost of higher education for yourself or your spouse . . . not just for your children.

The credit is worth up to $2,000 a year, based on 20% of up to $10,000 you spend for post-high-school courses that lead to new or improved job skills. Classes you take even in retirement at a vocational school or community college can count. If you brushed up on skills in 2014, this credit can help pay the bills. The right to claim this tax-saver phases out as income rises from $54,000 to $64,000 on an individual return and from $108,000 to $128,000 for couples filing jointly.

Deduct Those Blasted Baggage Fees

Airlines seem to revel in driving travelers batty with extra fees for baggage, online booking and for changing travel plans. Such fees add up to billions of dollars each year. If you get burned, maybe Uncle Sam will help ease the pain. If you’re self-employed and travelling on business, be sure to add those costs to your deductible travel expenses.

Credits for Energy-Saving Home Improvements

There’s no longer a tax credit to encourage homeowners to save energy by, for example, installing storm windows and insulation. But the law still offers a powerful incentive for those who install qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines. Your credit can be 30% of the total cost (including labor) of such systems installed through 2016.

Bonus Depreciation

Business owners–including those who run businesses out of their homes–have to stay on their toes to capture tax breaks for buying new equipment. The rules seem to be constantly shifting as Congress writes incentives into the law and then allows them to expire or to be cut back to save money. Take “bonus depreciation” as an example. Back in 2011, rather than write off the cost of new equipment over many years, a business could use 100% bonus depreciation to deduct the full cost in the year the equipment was put into service. For 2013, the bonus depreciate rate was 50%. The break expired at the end of 2013 and stayed expired until the end of 2014 . . . when Congress reinstated it retroactively to cover 2014 purchases. (That reprieve ended on December 31, when the provision expired again . . . but it does apply to 2014 returns.)

Perhaps even more valuable, though, is another break: supercharged “expensing,” which basically lets you write off the full cost of qualifying assets in the year you put them into service. This break, too, comes and goes. But as part of last-minute 2014 tax legislation, for 2014 purchases, it applies to up to $500,000 worth of assets. The $500,000 cap phases out dollar for dollar for firms that put more than $2 million worth of assets into service in 2014. For now, the limit for purchases made in 2015 is just $25,000 and it phases out once more than $200,000 of assets are placed in service. (There’s a good chance Congress will sweeten this break, again, before 2015 returns are due in 2016.)

Break on the Sale of Demutualized Stock

In 2013, the IRS finally found a court that agrees with its tough stand on the issue of demutualized stock. That’s stock that a life insurance policyholder receives when the insurer switches from being a mutual company owned by policyholders to a stock company owned by shareholders. The IRS’s longstanding position is that such stock has no tax basis, so that when the shares are sold, the taxpayer owes tax on 100% of the proceeds of the sale. In 2009 and again in 2011, federal courts sided with taxpayers who challenged the IRS position. Shortly after the IRS won its case in early 2013, the court in one of the earlier cases came up with a complicated method to pinpoint a basis. Rather than agreeing with experts who say the basis should be 100% of the stock’s value at the time of the demutualization, the court’s method set the basis in the case at hand at between 50% and 60% of the stock’s value when the taxpayers received it. Sooner or later, the Supreme Court may have to settle things.

In the meantime, if you sold stock in 2014 that you received in a demutualization, you have a couple of choices. Claim a basis and, if the IRS rejects your position, file an appeal. Or use a zero basis, pay the tax on the full proceeds of the sale and then file a “protective refund claim” to maintain your right to a refund if the matter is eventually settled in your favor.

Social Security Taxes You Pay

This doesn’t work for employees. You can’t deduct the 7.65% of pay that’s siphoned off for Social Security and Medicare. But if you’re self-employed and have to pay the full 15.3% tax yourself (instead of splitting it 50-50 with an employer), you do get to write off half of what you pay. That deduction comes on the face of Form 1040, so you don’t have to itemize to take advantage of it.

Waiver of Penalty for the Newly Retired

This isn’t a deduction, but it can save you money if it protects you from a penalty. Because our tax system operates on a pay-as-you earn basis, taxpayers typically must pay 90% of what they owe during the year via withholding or estimated tax payments. If you don’t, and you owe more than $1,000 when you file your return, you can be hit with a penalty for underpayment of taxes. The penalty works like interest on a loan–as though you borrowed from the IRS the money you didn’t pay. The current rate is 3%.

There are several exceptions to the penalty, including a little-known one that can protect taxpayers age 62 and older in the year they retire and the following year. You can request a waiver of the penalty–using Form 2210–if you have reasonable cause, such as not realizing you had to shift to estimated tax payments after a lifetime of meeting your obligation via withholding from your paychecks.

Amortizing Bond Premiums

If you purchased a taxable bond for more than its face value–as you might have to capture a yield higher than current market rates deliver — Uncle Sam will effectively help you pay that premium. That’s only fair, since the IRS is also going to get to tax the extra interest that the higher yield produces.

You have two choices about how to handle the premium.

You can amortize it over the life of the bond by taking each year’s share of the premium and subtracting it from the amount of taxable interest from the bond you report on your tax return. Each year you also reduce your tax basis for the bond by the amount of that year’s amortization.
Alternatively, you can ignore the premium until you sell or redeem the bond. At that time, the full premium will be included in your tax basis so it will reduce the taxable gain or increase the taxable loss dollar for dollar.

The amortization route can be a pain, since it’s up to you to both figure how each year’s share and keep track of the declining basis. But it could be more valuable, since the interest you don’t report will avoid being taxed in your top tax bracket for the year–as high as 43.4%, while the capital gain you reduce by waiting until you sell or redeem the bond would only be taxed at 0%, 15% or 20%.

If you buy a tax-free municipal bond at a premium, you must use the amortization method and reduce your basis each year . . . but you don’t get to deduct the amount amortized. After all, the IRS doesn’t get to tax the interest.

Don’t Unnecessarily Report a State Income Tax Refund

There’s a line on the tax form for reporting a state income tax refund, but most people who get refunds can simply ignore it even though the state sent the IRS a copy of the 1099-G you got reporting the refund. If, like most taxpayers, you didn’t itemize deductions on your previous federal return, the state tax refund is tax-free. Even if you did itemize, part of it might be tax-free. It’s taxable only to the extent that your deduction of state income taxes the previous year actually saved you money. If you would have itemized (rather than taking the standard deduction) even without your state tax deduction, then 100% of your refund is taxable–since 100% of your write-off reduced your taxable income. But, if part of the state tax write-off is what pushed you over the standard deduction threshold, then part of the refund is tax free. Don’t report any more than you have to.

Legal Fees Paid to Secure Alimony

Although legal fees and court costs involved in a divorce are generally nondeductible personal expenses, you may be able to deduct the part of your attorney’s bill. Since alimony is taxable income, you can deduct the part of the lawyer’s fee that is attributable to setting the amount. You can also deduct the portion of the fee that is attributable to tax advice. You must itemize to get any tax savings here, and these costs fall into the category of miscellaneous expenses that are deductible only to the extent that the total exceeds 2% of your adjusted gross income. Still, be sure your attorney provides a detailed statement that breaks down his fee so you can tell how much of it may qualify for a tax-saving deduction.

Affordable Care Act Complicates 2014 Tax Code
Cuts to the IRS’ budget might have been less worrisome, save for the new rules introduced by the Affordable Care Act (ACA) and other legislation. As tax filers deal with new forms and rules for the first time, it’s expected to be a particularly confusing and frustrating tax year for many filers; but the IRS will have less manpower and resources to offer support.

The 2015 tax season marks the first return that taxpayers will fill out following the enactment of the Affordable Care Act, which includes many provisions that relate directly to taxes. Taxpayers will be required to provide proof of 2014 insurance coverage, as well as indicate whether they received tax credits to help cover insurance costs.

“The ACA is going to result in more confusion for existing clients and many taxpayers may well be very disappointed by getting less money and possibly even owing money,” said Charles McCabe, president of Peoples Income Tax and the Income Tax School, to The Wall Street Journal.

Some taxpayers who received health insurance subsidies will be disappointed to see a smaller refund if the tax credits they received were too large — or might even find that they owe the government money. H&R Block estimates that up to 6.8 million Americans will end up owing money after completing their tax returns because they were given larger health insurance tax credits than needed through the ACA.

How to Appeal Property Taxes

If you think you’re paying too much, take these steps. Home values are up, and that may mean your property taxes have gone up, too. But what if you believe they’re too high? You may have grounds for an appeal, and in most cases, you can do it yourself.

Step 1
First, look for errors that could be unfairly inflating the value of your home. Ask your local assessor’s office for a property record card, which lists the factors used to come up with your assessment. This information may be available online. Fixing obvious mistakes such as incorrect square footage or the wrong number of bathrooms could lower your property value.

Step 2
Next, check out tax bills for similar properties in your neighborhood. This is public information and may also be available online. Compare your home with others in your tax classification, which usually lumps together homes of similar size and age. If your assessment is much higher than the assessment for other homes in your group, you could have a good shot at an appeal.

Step 3
Finally, make sure you’ve been given all of the tax breaks you deserve. Most states offer exemptions, lower tax rates or reduced assessment ratios for certain taxpayers, such as primary homeowners, senior citizens, or veterans. Check your state’s department of taxation Web site for more information. You can also find more information on appealing a property tax bill at NTU.org, the Web site for the National Taxpayers Union. Looking for more ways to lower your tax bill? Start by making sure that you aren’t missing out on the most common overlooked tax deductions.

Deduct Specialized Medical Expenses
Medical expenses that can be deducted on Schedule A, with anything over 7.5% of your adjusted gross income qualifying as deductible. Besides the medical travel and long-term care, here are a few other medical expenses that can get you past the threshold and into deduction-land:

Health insurance premiums, whether paid directly or deducted from your payroll or pension check, are deductible as long as the payroll deduction is not part of a pre-tax Section 125 or cafeteria plan. This includes COBRA payments, dental and contact lens insurance, a separate charge for medical coverage included in your dependent child’s college fees, and the amount deducted from Social Security and Railroad Retirement benefits to pay for Medicare Part B and Part D premiums.
Special supplies and equipment to treat medical conditions are tax-deductible, such as eyeglasses and contact lenses, hearing aids, dentures and false teeth, artificial limbs, prosthetic devices, crutches, orthopedic shoes, wheel chairs, diabetic testing materials, elastic stockings, and special telephone and television close-captioning equipment for the hearing impaired. The cost of maintenance and upkeep of these items, such as hearing aid batteries and repairs and contact lens solution, is also deductible.
Stop smoking programs, whether or not prescribed by a doctor, and prescription drugs to alleviate nicotine withdrawal are all tax-deductible. Non-prescription “over-the-counter” aids such as nicotine gum and patches are not deductible, though.

Tuition and fees for a disabled person, or a person with severe learning disability, to attend a special school can also be deducted on your tax return. Meals and lodging at the school and round-trip travel can also be deducted. Overcoming the disability must be the principal reason for attending the school. Dyslexia is considered a severe learning disability.

ObamaCare on Your 2014 TaxReturn

If the Form 1095-A is not received by early February, contact the Marketplace where coverage was purchased. Do not contact the IRS because IRS telephone assistors will not have access to this information.

2015 IRS Standard Mileage Rates Announced:
Get a Tax Deduction for Driving

NEW YORK (Main Street) — The Internal Revenue Service has issued the 2015 optional standard mileage allowance rates used to claim a tax deduction for driving an automobile for business, charitable, medical or moving purposes.

Beginning on January 1, 2015, the standard mileage rates for the use of a car will be:

57.5 cents per mile for business miles, up 1.5 cents from 2014
23 cents per mile for medical or moving miles, down 0.5 cents from 2014
14 cents per mile driven in volunteer service of charitable organization, unchanged.

The portion of the business standard mileage rate considered to be depreciation is 24 cents for 2015, up 2 cents from 2014.

These rates apply no matter where in the United States you drive, and no matter what type, model or make of car you drive. It is available for both a car that you own and a car that you lease.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas and oil. The rate for medical and moving purposes is based on the variable costs.

It appears that the actual cost of purchasing an automobile, a fixed cost, has increased, but the variable costs, like gas, have decreased.

The charitable rate is set by Congress, and has been 14 cents per mile since 1998, except for special temporary rates for Katrina- and Midwest Disaster-related charitable travel.

Historically, the highest standard mileage allowances were for the period July – December of 2008, when the business rate was 58.5 cents per mile and the medical and moving rate was 27 cents per mile.

Taxpayers have the option of claiming either the standard mileage rate or actual costs. You obviously want to use the method that gives you the biggest tax deduction.

You can’t use the standard mileage allowance for business miles if the car is used for hire, such as a taxi; if you have five or more vehicles in use for business at the same time, such as a fleet operation; or if you have claimed a Section 179 expense deduction and/or any method of depreciation other than straight line in the past.

Generally, to claim the standard mileage allowance for business driving you must elect to do so in the first year the car is placed in service – the year you purchased the car, or the first year you used the car for business if later. If you claim the standard mileage rate in the first year, you can switch to actual expenses in a later year – but if you claim actual expenses in the first year, you may not be able to change over to the standard mileage allowance in later years. If you choose to claim the standard mileage allowance on a leased car, you must use it for the entire period of the lease.

Tax Breaks for Dependent-Care Expenses

For most couples, using money from a flexible spending account offers a bigger tax break than the child-care credit.

My husband and I both work and have more than $20,000 in annual day-care expenses for our two children. We have dependent-care flexible-spending accounts at work and contribute $5,000 between the two of us. Can we also claim the child-care tax credit for our additional expenses? If not, is it better to use the money from the dependent-care FSAs or to take the child-care credit?

Because you have two children in day care and pay more than $6,000 a year for their care, you can use the $5,000 from your flexible spending accounts and also claim the child-care credit for up to $1,000 of expenses.

Unless you have a very low income, it’s generally better to use money from your dependent-care FSAs first. Contributing to a dependent-care FSA generally gives you a bigger break than taking the child-care credit because the money you put aside avoids not only federal income taxes but also the 7.65% Social Security and Medicare tax. It may escape state income taxes, too. If you’re in the 25% federal tax bracket and pay 5% in state taxes, for example, you would save $1,883 in taxes.

The child-care credit, on the other hand, is worth 20% to 35% of the cost of care (depending on your income), on up to $3,000 of child-care costs for one child or $6,000 for two or more children. The credit is worth 20% of eligible expenses if you earn more than $43,000 per year, so if you choose that route rather than the FSA, the most it can reduce your tax liability is by $600 for one child or $1,200 for two or more children if your income is above that level.

If you use $5,000 from your dependent-care FSAs, you can’t claim the child-care credit for the same expenses. But because the child-care tax credit limit is based on $6,000 of expenses per year if you have two or more kids and file jointly, as single or as head of household, and the FSA limit is $5,000 per household ($2,500 per person if married filing separately), you can claim up to $1,000 in additional expenses for the credit. That can reduce your tax liability by an extra $200 to $350, depending on your income.

You can use money from the a dependent-care FSA or take the child-care credit for the cost of care for your children under age 13 while you work or look for work (both spouses must work, unless one is a full-time student). The cost of day care, a nanny or preschool counts, as do the costs of before-school and after-school care and summer day camp.

For more information about the child-care credit, see IRS Publication 503 Child and Dependent Care Expenses