1. 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. The IRS has tables for residents of states with sales taxes showing how much they can deduct.
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.
2. 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 2010, remember to deduct 14 cents per mile.
One deduction people often overlook is the IRA and can be taken today (if eligible) that will significant reduce your 2010 taxable income. You can make a deductible 2010 IRA contribution as late as April 15, 2011, provided you meet the income requirements. Alternatively, if you can’t make a deductible IRA contribution, you may still be able to contribute to a Roth IRA (subject to income limits). Although a Roth IRA is not tax deductible, your contributions won’t be taxed again when you withdraw the money and its earnings, presumably in retirement.
4. 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.
5. Job related moving expenses
Here’s an interesting dichotomy: Job-hunting expenses incurred while looking for a job are not deductible, but moving expenses to get to that job are. And you get this write-off even if you don’t itemize. If you moved more than 50 miles, you can deduct 16.5 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.
6. 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.
7. Earned Income Tax Credit (EITC)
Millions of lower-income people miss out on this every year. In 2008, 24.8 million taxpayers used the EITC program to claim more than $50 billion, or an average of $2,000. 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 $457 to $5,666. 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.
Another feature is that you can get the credit sooner rather than later. If you expect to qualify for the credit in 2010 and you have at least one dependent child, you can request part of that credit immediately under the “Advance EITC Program.” You must fill out a Form W-5, which will probably only take you a few minutes to complete.
8. 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.
Check out even more deductions at the TurboTax website