Every year, the IRS 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.
See also: What's new for taxes in 2012.
But think about it for a minute: Do you think that’s the most common mistake ... or simply the easiest to notice?
One thing we know for sure is that the opportunity to make mistakes is almost unlimited, and missed deductions can be the most costly. About 45 million of us itemize on our 1040s — claiming more than $1 trillion worth of deductions. That’s right: $1,000,000,000,000, a number rarely spoken out loud until Congress started tying itself up in knots trying to deal with the budget deficit and national debt.
Another 92 million taxpayers claim about $700 billion worth using standard deductions — and some of you who take the easy way out probably shortchange yourselves. (If you turned 65 in 2011, 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. Years ago, the fellow who ran 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 below:
1. State sales taxes. Although all taxpayers have a shot at this write-off, which has recently been extended through 2011, 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 is a bigger burden than the sales tax, so the income-tax deduction is a better deal.
The 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 the IRS tables for your state, to the extent that the sales-tax rate you paid doesn’t exceed the state’s general sales-tax rate.
The same goes for any homebuilding materials you purchased. These add-on items are easy to overlook, but they 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 website to help you figure the deduction, which varies depending on the state where you live and your income level.
2. Reinvested dividends. This isn't really a tax deduction, but it is an important 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. Don’t make that costly mistake. If you’re not sure what your basis is, ask the fund for help.
Next: Out-of-pocket charitable contributions. >>
3. 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 organization’s soup kitchen and stamps you buy for your school’s fundraising mailing count as a charitable contribution. Keep your receipts and if your contribution totals more than $250, you’ll need an acknowledgement from the charity documenting the services you provided. If you drove your car for charity in 2011, remember to deduct 14 cents per mile.
4. 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. Mom and Dad also don’t get the interest deduction since they were not liable on the debt.
5. Job-hunting costs. If you’re among the millions of unemployed Americans who were looking for a job in 2011, keep track of your job-search expenses. If you’re looking for a position in the same line of work, you can deduct job-hunting costs as miscellaneous expenses if you itemize, but only to the extent that the total of your total miscellaneous itemized deductions exceed 2% of your adjusted gross income. Job-hunting expenses incurred while looking for your first job don’t qualify. Deductible job-search costs include, but aren’t limited to:
• Food, lodging and transportation if your search takes you away from home overnight
• Cab fares
• Employment agency fees
• Costs of printing resumes, business cards, postage, and advertising
6. Moving expenses to take your first job. As we just mentioned, job-hunting expenses incurred while looking for your first job are not deductible. But, moving expenses to get to that position are. And you get this write-off even if you don't itemize.
To qualify for the deduction, your first job must be at least 50 miles away from your old home. If you qualify, you can deduct the cost of getting yourself and your household goods to the new area. If you drove your own car, your mileage write-off depends on when during 2011 you moved. For moves from January 1 through the end of June, the standard mileage rate is 19 cents a mile; for moves during the second half of the year, a 23.5 cents a mile rate applies. In either case, boost your deduction by any amount you paid for parking and tolls.
7. 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. 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 qualifying trips during January through June, 2011, the standard mileage rate is 51 cents a mile; for driving during the second half of the year, the rate is 55.5 cents a mile. In any event, add parking fees and tolls. And, you don’t have to itemize to get this deduction.
Next: Health insurance for the self-employed >>
8. 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 and the cost of supplemental Medicare (medigap) policies. This deduction is available whether or not you itemize and is not subject 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 your employer (if you have a job as well as your business) or your spouse’s employer.
9. 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.
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 pre-tax dollars – that might be a 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 expenses for the care of children under 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.
10. 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 $45,000 to the estate-tax bill. You get to deduct that $45,000 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 $22,500 itemized deduction on Schedule A. That would save you $6,300 in the 28% bracket.
11. State tax paid last spring. Did you owe tax when you filed your 2010 state income tax return in the spring of 2011? Then, for goodness’ sake, remember to include that amount in your state-tax deduction on your 2011 return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments.
12. 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 a mortgage, though, you have to deduct the points over the life of the 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.
Next: More on refinancing your mortgage. >>
Even more important, in the year you pay off the loan — because you sell the house or refinance again — you get to deduct in one fell swoop all of the 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 -- and deduct that amount gradually over the life of the new loan.
13. 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 the 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 to the left.
14. American Opportunity Credit. This tax credit is available for up to $2,500 of college tuition and related expenses paid during the year. 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. This credit is juicier than the old Hope credit – it has higher income limits and bigger tax breaks, and it covers all four years of college. And if the credit exceeds your tax liability, it can trigger a refund. (Most credits can reduce your tax to $0, but not get you a check from the IRS.)
15. Deduct those blasted baggage fees. In recent years airlines have been driving passengers batty with extra fees for baggage and for making changes in their travel plans. All together, 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 cost to your deductible travel expenses.
16. Credit for energy-saving home improvements. Although this credit has been scaled back, it still exists and might save you some money if you made energy-saving home improvements during 2011. The credit is worth 10% of the cost of qualifying energy savers including new windows and insulation. The maximum credit is $500 and, if you claimed this credit in the past, you’re probably out of luck now. That $500 is the maximum credit allowed on all tax returns from 2006 to 2011.
There’s also no dollar limit on the separate credit for homeowners 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.
Next: Additional bonus depreciation and more. >>
17. Additional bonus depreciation. Business owners can write off 100% of the cost of qualified assets placed in service during 2011. This break applies only to new assets with recovery periods of 20 years or less, such as computers, machinery, equipment, land improvements and farm buildings. So don’t miss out on this big tax benefit if you placed business assets in service during 2011.
18. Break on the sale of demutualized stock. Taxpayers won an important court battle with the IRS over 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 stockholders. The IRS’s longstanding position was that such stock had no tax basis, so that when the shares were sold, the taxpayer owed tax on 100% of the proceeds of the sale. But after a long legal struggle, a federal court ruled in 2009 that the IRS was wrong. The court didn’t say what the basis of the stock should be, but many experts think it’s whatever the shares were worth when they were distributed to policyholders. If you sold stock in 2011 that you received in a demutualization, be sure to claim a basis to hold down your tax bill.
19. Home-buyer credit. Most people think this credit expired in 2010 ... and it did for most homeowners. But, there’s a special rule for members of the uniformed armed services, the foreign service or the intelligence community who were on extended duty outside the United States at least 90 days during the period after December 31, 2008, and ending before May 1, 2010. If you qualify and you bought a home before May 1, 2011, you may qualify for a tax credit worth $8,000 (for home buyers who didn’t own a home in the three years leading up to the purchase of a new home) or $6,500 (for longtime homeowners who continuously owned a home for at least five of the eight years leading up to the purchase of a new home). The credit gradually disappears and is phased out for taxpayers with adjusted gross incomes between $125,000 and $145,000 (for singles) and $225,000 and $245,000 (for married couples who file jointly).
Copyright 2011 The Kiplinger Washington Editors
Also of interest: Get more tax tips. >>