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The following post is by MPFJ staff writer, Kevin Mercadante, who is a professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has a background in both accounting and the mortgage industry.
There are more than a few tax breaks that most people are not aware of, but using just one or a combination of several could reduce your income tax bill considerably. If any of these apply to you, you may be getting more money back from the IRS than you think.
Medicare insurance premiums
If you receive Social Security income, you will get a Form 1099G that reports your income to the IRS. That form will also include the amount of Medicare premiums you paid for the year. That premium is deductible as a medical expense on Form 1040 Schedule A.
Medical expenses are deductible to the extent they exceed 7.5% of your adjusted gross income (AGI), which means you’ll want to make the medical total as large as possible. Medicare premiums paid will help you get there.
Even better, if you’re self-employed, you can deduct a portion of them from your gross income even if you don’t itemize.
Overlooked medical deductions
Remember that 7.5% of AGI threshold you have to exceed in order to be able to get the benefit of the medical expense deduction? Fortunately, there’s a lot that goes into medical, including insurance premiums paid (and not already deducted on your W2), hospital stays, doctor visits, medical tests and prescriptions—you probably know all about those already.
But, did you also know that you can deduct dental and vision expenses? In addition, you can deduct the cost of transportation to and from medical facilities, including medical mileage at 23 cents per mile. It will take a lot to get to 7.5% of your AGI, so consider all of these expenses to help you get there.
Job hunting expenses
The IRS allows you to deduct job hunting expenses to the extent they exceed 2% of your AGI. The threshold may not be much of a problem if the expenses are incurred in a year when you were unemployed for much of the year. A low AGI will mean that the 2% limit is also low.
You can deduct the cost of printing, postage, job agency fees, and travel expenses for interviews (only if you paid). If that travel involved driving your own car, you can deduct the IRS per mile expense allowance.
Tax preparation fees
Any expenses paid in connection with the preparation of your income tax returns is deductible, also subject to 2% of AGI. You can also include any legal or professional fees incurred in connection with research specifically related to your income tax return, as well as postage fees.
Investment management fees, account maintenance fees, and the costs of books, manuals, and periodicals related to your investment activities can be deducted. This deduction is also subject to the 2% of AGI limitation, but as you can see, if you have enough of these various deductions, you can clear the threshold and get a decent additional deduction, just by reporting expenses you already pay.
A lot of people do volunteer work, but did you know that you can also deduct expenses incurred in connection with that effort? The IRS allows a 14 cents per mile deduction on volunteer related driving, and you can also deduct the cost of donated items. This may come about as a result of you purchasing supplies or various sundry items used in connection with the volunteer effort. Keep your receipts—you’ll need to use them at tax time.
Energy efficient upgrades
This credit applied through 2011, and allows for a tax credit of up to 30% of the purchase price of certain energy efficient equipment installed in your home, up to a maximum of credit of $1,500. Included are energy efficient equipment like furnaces, air conditioners and water heaters, and even attic insulation, energy efficient windows and doors, and certain new roofs. The credit is only for new equipment installed on an existing owner occupied home.
This credit was scheduled to expire at the end of 2011. However, save any receipts and documentation for such upgrades purchased and installed in 2012 and 2013. This was established as a temporary credit, but such credits have a history of being resurrected retroactively well after the fact, and even after the tax year to which they apply.
Additional state income tax assessments
Have you ever gotten a notice from the state income tax agency informing you that you owe additional tax for a previous year? That notice isn’t good news, but you can recover some of it by deducting it in the year you pay it.
Non-cash charitable deductions
Most of us are aware that cash contributions to charities are deductible, but you can also deduct non-cash contributions of used clothing and household goods. You’re probably familiar with these from the pick-up services from the various charities that call looking for donations of goods. Keep a record of what you contribute and who it was you gave them to. The pick up service usually provides a card to confirm the pick up and you can enter the contents and estimated value when you get it.
Don’t overlook this deduction. Several pick-ups per year can provide you with hundreds of dollars of extra charitable deductions. Just be aware that any single donation valued at over $500 will require additional documentation.
If you pay mortgage points (one point is one percent of the mortgage loan amount) when you buy a house, you can deduct the full amount in the year you bought the home. The rules are more involved for refinances.
When you pay points in connection with the refinance of an existing mortgage, you can amortize the cost of the points over the life of the loan. For example, if you paid points to refinance your old mortgage into a new 30 year mortgage, you can deduct 1/30th of the amount of the points paid for each year.
If you pay the loan off at any time during the term of the mortgage, you can deduct the full amount of the remaining, amortized refinance points in the year of the payoff.
Please note that any of the above deductions and credits may change by tax filing time. Some are the result of “Bush-era tax cuts” that may or not apply in 2012 or 2013, and are currently subject to review. Please check with your tax advisor for the rules specific to your circumstances.
How about you all? What tax deductions do you take advantage of the most and which do you often find yourself overlooking?
Share your experiences by commenting below!
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