10 Commonly Missed Tax Deductions That Could Save You Thousands
Taxes make it harder for investors to reach their financial goals by steadily chipping away at your income and investment earnings. That all leads to one inescapable conclusion: to build up your net worth
To minimize your taxes paid, you must stay apprised of the basic tax rules -- and stop letting the deductions you deserve slip through the cracks. It's hard to believe that while many folks love to complain about taxes, those same people may be failing to take advantage of the many legal deductions available to them. Come tax time, don't leave money on the table!
Maintaining tax-smart records is always a good idea. Keeping track of your deductible expenses will save you from a world of pain if the IRS decides to audit you. Nowhere is incomplete record keeping more deadly than in an audit because without documentation, any of these deductions are likely to be disavowed by the IRS in an audit. That means, when applicable, you should pay by check and credit card, or insist on cash receipts.
I recently spoke with a few accountants, who told me that the following tax deductions are the most commonly overlooked by their clients:
1) State & Local Sales Tax
The December 2010 tax legislation extends a number of tax breaks, including the option to deduct state and local sales tax instead of state and local income tax on your federal tax return. This deduction comes in handy if you live in one of the seven states with no state income tax -- Alaska, Washington, Nevada, Wyoming, South Dakota, Texas and Florida.
2) Reinvested Dividends
Investors who automatically reinvest their mutual fund dividends often overlook the opportunity to use this purchase of new shares to increase their cost basis. This doesn't really count as a deduction today, but by increasing your cost basis, you'll decrease the amount of capital gains tax you pay in the future.
3) Mileage Related to Charity
4) Mortgage Points When You Refinance a Second Time
In most cases, the points you pay upfront to refinance a mortgage are written off little by little over the life of your new loan. But if you refinance your principal residence a second time before all the points are written off on the first refinance, you can usually deduct the entire remaining balance in that year.
5) Last Year's State Income Tax Payment
6) Job-Related Moving Expenses
With our increasingly mobile job force, many people find themselves taking new jobs far from their old ones. If you made a job-related move in 2010, make sure you check if you met the distance and time test set by the IRS. In most cases, if you moved within one year of reporting to a new job and the distance between your new home and new job is not farther than the distance between your old home and your new job, you can deduct the un-reimbursed cost of moving your household items and your travel expenses (sans meals). To see if you qualify, click here to use the Tax Trails feature on the IRS website.
7) Child Tax Credits
You can claim the child tax credit and get a $500 tax credit per child on your tax return, as long as your children are under age 17 at the end of the tax year. Incredibly, many parents miss this useful perk. And if you are a working parent or are looking for work, you may qualify for additional tax deductions meant to offset the cost of childcare for children under the age of 13.
8) The Earned Income Tax Credit (EITC)
This is a significant refundable credit for low-to-moderate income earners. When the EITC exceeds the amount of taxes owed, it results in a refund. And here's another bonus: If you think you qualify for the EITC, you may also qualify to receive free help preparing your tax return. Check here to see if you qualify.
9) Job Search Expenses
If you're unemployed and looking for work in your current field, you can deduct the expenses of, say, a career search firm or travel costs that are associated with your hunt for employment. Unfortunately, if you're looking for a totally new career or job searching for the first time, job search expenses are not deductible.
10) Losses Caused by Natural Disasters
If you live in an area that was designated a federal disaster area and your insurance company didn't cover your entire loss, you can deduct the value of the lost items. Make sure you take pictures and keep good records for the items that were destroyed. And be ready to submit proof of the original value of the property.