11 Most Overlooked Deductions
Sunday, February 15, 2009
Every year, the IRS dutifully reports the most common blunders taxpayers make on their returns. And every year, at or near the top of the "oops" list is forgetting to enter a Social Security number or making a mistake when entering those nine digits at the top of the tax form.
Before you bemoan such stupidity of your fellow Americans, ask yourself a simple question: Is that the most common error? Or just the most easily noticed goof?
Who knows how many people forgot -- or never knew about -- a deduction that could save them money? That's not the kind of thing government bean counters lose a lot of sleep over.
No doubt about it: The opportunity for mistakes is almost limitless. The most recent numbers show that about 46 million of us itemized deductions on our 1040s -- claiming nearly $1 trillion in deductions. That's right: $1,000,000,000,000, a number rarely mentioned out loud until Congress took up the bailout effort for the financial system.
Another 85 million taxpayers claimed more than half a trillion dollars' worth of standard deductions. Some of those who took the easy way out probably shortchanged themselves. (If you turned 65 in 2008, remember that you deserve a bigger standard deduction than younger folks.)
Yes, friends, tax time is a dangerous time. It's all too easy to miss a trick and pay too much. Here are the 11 most overlooked tax deductions. Claim them if you deserve them, and cut your tax bill to the bone.
State sales taxes
Although all taxpayers have a shot at this write-off, it makes sense primarily for those who live in states that do not impose an income tax. You must choose between deducting state and local income taxes or state and local sales taxes. For most citizens of income-tax states, the income-tax deduction is a better deal.
IRS has tables that show how much residents of various states can deduct. But the tables aren't the last word. If you purchased a vehicle, boat or airplane, you get to add the state sales tax you paid to the amount shown in IRS tables for your state, to the extent the sales-tax rate you paid doesn't exceed the state's general sales-tax rate. The same goes for home building materials you purchased. These items are easy to overlook, and these add-ons could make the sales-tax deduction a better deal even if you live in a state with an income tax. The IRS even has a calculator on its Web site to help you figure the deduction, which varies depending on state and income level.
This isn't really a deduction, but it is a subtraction that can save you a bundle. If, like most investors you have mutual fund dividends automatically invested in 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 the reinvested dividends in your basis -- which you subtract from the proceeds of sale to pinpoint your gain -- means overpaying your tax.
Out-of-pocket charitable contributions
It's hard to overlook the big charitable gifts made during the year, by check or payroll deduction (check your December pay stub). But the little things add up, too, and you can write off out-of-pocket costs incurred while doing good works.