The tax deductions most often overlooked
Every year, the Internal Revenue Service dutifully reports the most common blunders that taxpayers make on their returns. And every year, at or near the top of the "oops" list is forgetting to enter their Social Security number at the top of the tax form -- or making a mistake when entering those nine digits.
No doubt about it: The opportunity to make mistakes is almost unlimited, and missed deductions can be the most costly. About 46 million of us itemize on our 1040s -- claiming nearly $1 trillion worth of deductions. That's right: $1,000,000,000,000, a number rarely spoken out loud until Congress started debating economic-stimulus plans to combat the Great Recession.
An additional 85 million taxpayers claim more than half a trillion dollars' worth using standard deductions -- and some of you who take the easy way out probably shortchange yourselves. (If you turned 65 in 2009, remember that you now deserve a bigger standard deduction than the younger folks.)
Yes, friends, tax time is a dangerous time. It's all too easy to miss a trick and pay too much. Don't overlook these money savers:
-- 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 residents of states with income taxes, the income tax is a bigger burden than the sales tax, so the income tax deduction is a better deal.
-- Reinvested dividends. This isn't really a deduction, but it is a subtraction that can save you a bundle. And this is the break that former IRS commissioner Fred Goldberg told Kiplinger's a lot of taxpayers miss.
If, like most investors, your mutual fund dividends are 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 the reinvested dividends in your basis results in double taxation of the dividends -- once when you receive them and later when they're included in the proceeds of the sale.
-- 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 the little things add up, too, and you can write off out-of-pocket costs incurred while doing good works. For example, ingredients for casseroles you prepare for a nonprofit group's soup kitchen and stamps you buy for a school fundraising mailing count as charitable contributions. If you drove your car for charity in 2009, deduct 14 cents per mile.
-- Student loan interest paid by Mom and Dad. Generally, you can only deduct mortgage or student loan interest if you are legally required to repay the debt. But if parents pay back a child's student loans, the IRS treats the money as if it was given to the child, who then paid the debt. So a child who's not claimed as a dependent can qualify to deduct up to $2,500 of student loan interest paid by Mom and Dad. And he or she doesn't have to itemize to use this money saver.
-- Military reservists' travel expenses. Members of the National Guard or military reserve may tap a deduction for travel expenses to drills or meetings. To qualify, you must travel more than 100 miles from home and be away from home overnight.
-- 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.
If you pay your child-care bills through a reimbursement account at work, it's easy to overlook the child-care credit. 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.