Now that Tax day has come and gone . . .let’s start planning for next year. Maybe today was good and maybe today was bad and you extended and are currently cursing the tax plan and all politicians everywhere . . .not projecting at all. Here are our 11 most overlooked rational tax deductions. Claim them if you deserve them, and keep more money in your pocket. Remember, tax refunds are an interest free loan to the government.
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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 to help you figure out the deduction, which varies by your state and income level. If you live in Texas, forget everything I just said and count your blessings you don’t have an income tax.
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Reinvested dividends
This isn’t really a tax deduction, but it is a subtraction that can save you a lot of money. And it’s one that many taxpayers miss. If, like most investors, you have mutual fund dividends automatically invested in extra shares, remember that each reinvestment increases your “tax basis” in the fund. That, in turn, reduces the amount of taxable capital gain (or increases the tax-saving loss) when you sell your shares.
Forgetting to include the reinvested dividends in your cost basis—which you subtract from the proceeds of sale to determine your gain—means overpaying your taxes. Most tax-loss harvesting systems like Betterment do this for you automatically.
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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 baked goods you regularly prepare for a nonprofit organization’s soup kitchen, for example, or the items you donated to a local charity for pets or hungry children. If you drove your car for charity in 2017, remember to deduct 14 cents per mile. Meals on Wheels is a great service and the tax deduction makes it doubly beneficial. Don’t drive for Meals on Wheels just for tax savings…
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Student loan interest paid by Mom and Dad
In the past, if parents paid back a student loan incurred by their children, no one got a tax break. To get a deduction, the law said that you had to be both liable for the debt and actually pay it yourself. But now there’s an exception. If Mom and Dad pay back the loan, the IRS treats it as though they gave the money to their 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. Hooray for student debt! Now your parents will thank YOU for costing them money.
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Moving expense to take first job
Here’s an interesting dichotomy: 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. This includes any expenses you used in the moving process. Boxes, packing goods, food while moving, etc.
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Child and Dependent Care Tax Credit
A tax credit is so much better than a tax 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 and dependent 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.
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HSA Account Contributions
If you have a high-deductible health insurance plan, check to see if your plan allows for HAS contributions. Last year individuals could contribute up to $3,400 pre=tax dollars to an HSA plan. Families had the ability to contribute $6,750. These contributions are prior to social security and income tax deductions and grow tax free. No penalties are owed for withdrawals as long as those withdrawals are for health related expenses. Once you reach age 65, you can withdraw funds penalty-free for medical expenses you incurred before you reached age 65. Check out our article on my favorite tax-saving tool.
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State tax you paid last spring
Did you owe taxes when you filed your 2016 state tax return in 2017? Then remember to include that amount with your state tax itemized deduction on your 2017 return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments.
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Refinancing mortgage 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.
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Traditional IRA contributions
You have until next tax day (April 15) to make a tax-deductible contribution to a traditional IRA and have it count for 2018. The most you can contribute for the year is $5,500 ($6,500 if you’re over 50). How much of your contribution will be deductible depends on your income and whether you have a retirement plan at work. No reason not to max this bad boy out. Your future self will thank you.
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Medical Expenses
You can take this deduction if you itemize, and the new tax law made it a little easier to take, temporarily. The general rule is that you may deduct any unreimbursed medical and dental expenses that exceed 10% of your adjusted gross income. But that threshold is lowered to 7.5% of AGI for tax years 2017 and 2018 only.
Stay Rational. Save Taxes
-B&T