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Most Overlooked Deductions

The following are the most overlooked tax deductions. Not every item will be applicable to your situation. Most taxpayers are entitled to the standard deduction - a fixed amount that reduces the amount of income on which you are taxed. However, certain kinds of deductions are called itemized deductions. If you have enough of them to beat the standard deduction, it is usually a good idea to itemize instead.

 Medical-related Tax Deductions
  •  Medical transportation expenses including tolls, parking, and mileage for trips to health facilities, doctor's offices, laboratories, etc.
  •  Nursing home expenses that are primarily for medical care
  •  Medical aids such as crutches, canes, and orthopedic shoes
  •  Hearing aids, eye glasses, and contact lenses
  •  Hospital fees for services such as nursing, physical therapy, lab tests, and x-rays
  •  Equipment for disabled or handicapped individuals
  •  Part of the life-care fee paid to a retirement home designated for medical care
  •  The cost of alcohol and drug abuse programs, and certain smoking-cessation treatments
  •  Wages for nursing services
 Job-related Tax Deductions
  •   Education expenses you paid to maintain or improve job skills
  •   A handicapped individual's work-related expenses
  •   Professional journals, magazines, and newspapers that are job-related
  •   Cost of safe deposit box used for investments or business
  •   Seeing-eye dogs for the handicapped or guard dogs for a business
  •   Required uniforms and work clothes not suitable for street wear
  •   Union dues
  •   Employment agency fees or commissions in certain cases
  •   Home office expenses, if for your primary place of business
  •   Job-seeking expenses within your present field of employment
  •   Reservist and National Guard overnight travel expenses
  •   Dues to professional organizations
  •   Business gifts up to $25 per customer or client
  •   Business expenses including travel, meals, lodging, and entertainment not reimbursed by your employer
  •   Cleaning and laundering services while traveling for business
  •   Tools for use at your job
  •   Cellular phones required for business
  •   Half of the self-employment tax paid
  •   Self-employed health insurance premiums
 Property-related Tax Deductions
  •   Commission to brokers or agents for the sale of property or property management
  •   Your moving expenses
  •   Personal property taxes on cars, boats, etc.
  •   General casualty and theft losses in excess of $100 and totaling more than 10% of adjusted gross income
 Miscellaneous Tax Deductions
  •   Student loan interest
  •   Special school costs for mentally or physically handicapped individuals
  •   Worthless stock or securities
  •   Fees for tax preparation or advice
  •   Legal fees to collect taxable alimony or Social Security
  •   Hobby expenses to the extent of hobby income you included in gross income
  State sales taxes

This write-off 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 usually is a better deal. IRS has tables for residents of states with sales taxes showing how much they 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. The IRS even has a calculator on its Web site to help you figure out the deduction, which varies by your state and income level.

  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 that 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 they were paid out and immediately reinvested in more shares 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. (Starting with sales in 2012, mutual funds must report to investors -- and the IRS -- the tax basis of shares redeemed during the year. But note this: The new rule applies only to shares purchased in 2012 and later years. If you redeemed shares you purchased prior to 2012, it's still up to you to figure your basis. Don't forget those reinvested dividends!)

  Out-of-pocket charitable contributions

It's hard to overlook the big charitable gifts you made during the year by check or payroll deduction. But the little things add up, too, and you can write off out-of-pocket costs you incur while doing good deeds. Ingredients for casseroles you regularly prepare for a nonprofit organization's soup kitchen, for example, or the cost of stamps you buy for your school's fundraiser count as a charitable contribution. If you drove your car for charity in 2012, remember to 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. Mom and Dad can't claim the interest deduction even though they actually foot the bill since they are not liable for the debt.

  Job-hunting costs / Moving expense to take first job

If you're among the millions of unemployed Americans who were looking for a job in 2012, we hope you kept track of your job-search expenses. Job-hunting expenses incurred while looking for your first job are not deductible, but moving expenses to get to that first job are. And you get this write-off even if you don't itemize. If you moved more than 50 miles, you can deduct 23 cents per mile of the cost of getting yourself and your household goods to the new area, (plus parking fees and tolls) for driving your own vehicle.

  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.

But it's easy to overlook the child care credit if you pay your child care bills through a reimbursement account at work. Until a few years ago, the child care credit applied to no more than $4,800 of qualifying expenses. The law allows you to run up to $5,000 of such expenses through a tax-favored reimbursement account at work.

Now, however, up to $6,000 can qualify for the credit, but the old $5,000 limit still applies to reimbursement accounts. So if you run the maximum $5,000 through a plan at work but spend more for work-related child care, you can claim the credit on up to an extra $1,000. That would cut your tax bill by at least $200.

  Earned Income Tax Credit (EITC)

Millions of lower-income people miss out on this every year. However, 25% of taxpayers who are eligible for the EITC fail to claim it, according to the IRS. Some people miss out on the credit because the rules can be complicated. Others simply aren't aware that they qualify.

The EITC is a refundable tax credit - not a deduction - ranging from $475 to $5,891. The credit is designed to supplement wages for low-to-moderate income workers. But the credit doesn't just apply to lower income people. Tens of millions of individuals and families previously classified as "middle class" - including many white-collar workers - are now considered "low income" because they lost a job, took a pay cut, or worked fewer hours last year.

The exact refund you receive depends on your income, marital status and family size. To get a refund from the EITC you must file for a tax refund, even if you don't owe any taxes. Moreover, if you were eligible to claim the credit in the past but didn't, you can file any time during the year to claim an EITC refund for up to three previous tax years.

  State tax you paid last spring

Did you owe taxes when you filed your 2011 state tax return in the spring of 2012? Then remember to include that amount with your state tax itemized deduction on your 2012 return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments.

  Refinancing points

When you buy a house, you get to deduct points paid to obtain your mortgage all at one time. When you refinance a mortgage, however, 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. Doesn't seem like much, but why throw it away?

Also, in the year you pay off the loan, because you sell the house or refinance again, you get to deduct all the points not yet deducted, unless you refinance with the same lender.

  Jury pay paid to employer

Some employers continue to pay employees' full salary while they are doing their civic duty, but ask that they turn over their jury fees to the company coffers. The only problem is that the IRS demands that you report those fees as taxable income. If you give the money to your employer you have a right to deduct the amount so you aren't taxed on money that simply passes through your hands.

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