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Each and every year, people miss out on tax deductions that would have otherwise enabled them to reduce their income tax liability or, for some, possibly even increase the amount of their tax refund. There are tax deductions available for medical expenses and transportation, volunteering, and even unemployment-related expenses. It is a good rule of thumb to always keep your receipts or cancelled checks associated with any tax deduction. To help you discover hidden tax breaks that you may be eligible for, I've developed this list of 13 commonly missed tax deductions:
1. Medical-Related Transportation
You may be able to deduct the cost of transportation to and from visits to the doctor's office. If you drive your own car, you can claim the mileage deduction, as well to any tolls and parking fees that you may incur. If you take public transportation to and from a doctor appointment, you may deduct those expenses as well.
Please note that medical-related transportation is a qualified medical expense, along with payments made to doctors, hospitals, nurses or laboratory fees, acupuncture treatments or inpatient treatment for alcohol or drug addiction, participation in weight-loss programs for specific diseases if diagnosed by a physician, prescription drugs, false teeth, eye glasses, eye surgery, wheelchairs, crutches, and guide dogs for the blind or deaf. You are entitled to deduct medical care expenses that exceed 7.5% of your adjusted gross income (AGI). This deduction can only be taken if you itemize your deductions on Form 1040, Schedule A.
2. Unemployment-Related Expenses
If you have had the misfortune of becoming involuntarily unemployed and are actively seeking employment, you will be relieved to learn that many expenses associated with job hunting are tax-deductible. For example, if you travel away from home to interview for a position, you can deduct those travel expenses and hotel costs (as long as the hotel expense is both ordinary and necessary) for the night prior to your interview. Parking fees, tolls, resume development services and other job hunting expenses may also qualify you for a tax deduction. However, job hunting expenses for your first job do not count. Also, in order for your expenses to qualify for the tax deduction, you must seek employment in the same industry in which you were most recently employed. This tax deduction is considered a miscellaneous itemized deduction. With miscellaneous itemized deductions, you may only deduct the amount that exceeds 2% of your AGI, and you will need to fill out Form 1040, Schedule A.
3. Expenses Incurred While Volunteering
Although you cannot deduct the value of the actual work that you do on a voluntary basis, you can deduct expenses that you incur as a result of providing that volunteer work. For example, if part of your charitable work through a church or other qualifying organization requires you to spend your own money or use your own vehicle - such as transporting children in the Big Brothers Big Sisters program to or from activities, or driving senior citizens to the grocery store - you can deduct those mileage or gasoline expenses, as well as any parking fees or tolls paid during travel while volunteering. Again, you must itemize in order to claim this tax deduction.
4. Interest Paid on Student Loans
You can deduct up to $2,500 of interest paid on qualified student loans per tax return per year, and you do not need to itemize deductions on your Schedule A in order to qualify (an above-line tax deduction). This deduction is limited by your AGI. If your AGI is under $60K, you may deduct up to $2,500 in interest paid on student loans. This tax deduction begins to phase out once your AGI reaches $60K ($125k if filing a joint return) and is eliminated once you make $75k or more ($155k if filing a joint return).
5. Educational Resources Used for Work
After you have graduated from college or completed a higher education program, you can deduct the cost of any textbooks and educational resources that you purchase for your professional library. You may not, however, deduct textbooks that were purchased specifically for college. These expenses are considered miscellaneous expenses and are subject to the 2% floor.
6. Natural Disaster Losses
If your insurance company did not cover 100% of the losses that you suffered as a result of a natural disaster, you can deduct the fair market value of any damaged items on your tax return. In order to be eligible for the deduction, the loss of property must have been caused from an event that is sudden, unexpected or unusual. Some examples of qualifying events include floods, hurricanes, tornadoes, fires and earthquakes.
7. Tax Preparation Fees
Surprisingly, not everyone realizes that they can deduct tax filing and tax preparation fees. If you pay someone - such as an accountant or bookkeeper - to complete your taxes on your behalf, you can deduct any fees paid for those services. You can also deduct the cost of e-filing your tax return, as well as the cost of any tax preparation software that you use to prepare and file your own taxes. This deduction is also subject to the 2% AGI limit, and to claim these tax preparation fees, you must file an itemized income tax return.
8. Relocation Expenses for New Employment
If you move in order to accept a new job, you may be able to deduct the moving costs associated with transporting your belongings from your prior home to your new home, as well as the mileage traveled. In order for these expenses to qualify, you must meet both the "distance test" and the "time test," and the move must be within one year of the date that you begin working at the new job. For the distance test, your new workplace must be at least 50 miles farther from your old residence than your prior job location was from your former residence. If you did not have a prior job, your new job must be at least 50 miles from your old residence. For the time test, you must work at least 39 weeks during the first 12 months immediately following your arrival to the area of your new job location.
9. Home Purchase and Refinancing Points
When you purchase a home or refinance an existing mortgage with points, you can deduct the cost of the points paid. When purchasing a home, you are allowed to deduct the cost of the points paid all at once as long as you meet certain conditions; otherwise, you must deduct the points over the lifetime of the mortgage. When you refinance an existing mortgage, the points that you pay are generally not fully deductible in the year in which you pay them. If you use past proceeds from the refinancing to improve your home, it is possible that you may be able to fully deduct the points related to the improvement in the year in which you paid them. The remainder of the points can be deducted over the life of the loan.
10. Interest Paid on Home Improvement Loans
If you have a mortgage, you most likely already know that you can deduct the interest that you pay on your mortgage; however, what you may not be aware of is that you can also deduct any interest paid on loans used to finance home improvements as long as you meet the 6 IRS tests discussed here. Generally, you lender will send you a year-end statement breaking down any interest paid.
11.Saver's CreditThe government realizes that social security probably won't be enough to keep you comfortable in retirement. To help people save, they are letting you have a tax credit for contributing money into your IRA, 401k, or other qualifying retirement accounts. For the current year, the tax credit is $1000 for an individual, or $2000 if filing jointly. With many companies doing a 401k match, this is one of the smartest credits to use.
12. Mortgage InsuranceLenders usually force you to have private mortgage insurance (PMI) when you can't put 20% of the homes value as a down payment. PMI can cost upwards of $250+ per month, which can greatly inflate your mortgage payment. To help off set these costs, they now allow you deduct the cost of your PMI. This will help you until your mortgage is low enough to get out from under the PMI clause, or until you can get a better deal by refinancing.
13. Catch up Retirement DeductionsWhile IRA contributions for people under the age of 50 is $5000 for 2012, it's higher for people over the age of 50. As previously mentioned, the government really wants you to save for retirement. Realizing that many people are behind their retirement goals, they let people over 50 contribute $6000 to their IRA. While it may not seem like much, if you combine it with a company 401k match, and the savers credit, it really is a good deal.
Choosing the Standard Deduction or Itemized Deductions
Many of the aforementioned deductions require you to file your income tax return with itemized deductions. There are many instances where individuals are better off taking the standard deduction because it gives them the lowest owed tax amount. Determining whether or not to itemize depends on how much you spent on certain expenses throughout the tax year. If your expenses are greater than your standard deduction amount, you are typically better off itemizing. The standard deduction amounts for 2012 are as follows:
Tax deductions change each and every year, so it is important to stay on top of the various tax law changes to ensure that you are not overpaying on your taxes. If you choose to itemize deductions, it is usually a good idea to have an experienced tax professional on your side to help ensure that any eligible deductions are taken properly.
Special thanks to Manny Davis for his contributions to this article.
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