Don't miss these overlooked tax deductions and credits
About 45 million folks claim itemized deductions on their tax returns -- that's about a third of all U.S. returns. Most people looking for deductions focus on things like mortgage interest, state income taxes, real estate taxes and charitable donations. These are the most obvious items that can be claimed as itemized deductions on Schedule A.
But there are some deductions that are not so obvious, and tend to be overlooked by a lot of folks. Here are a few of my favorite "most overlooked tax deductions."
State Income Tax paid for a prior-year return:
If you paid state income taxes when you filed your 2013 tax return, then you paid that tax in 2014. Don't forget to include this tax as an itemized deduction on your Schedule A of your 2014 tax return. The state income taxes you pay in 2014, regardless of what year they are for, can be deducted in the year paid.
Retirement Savers Credit:
Lower to moderate income workers who save in a 401(k) or individual retirement account can qualify to get a tax credit of up to $1,000 for individuals and up to $2,000 for couples. It's like getting paid to save because this is a tax credit that's in addition to the deduction you get for making pre-tax contributions. Since income limits apply, you'll need to check into the IRS' Savers Credit to get the details to see if you qualify.
Student Loan Interest:
If you paid interest on a student loan in 2014, then you could be eligible to claim a tax deduction of up to $2,500. This deduction can be claimed even if you don't have enough other deductions to itemize. Also, even if your parents make your loan payments for you, you can still claim this deduction as long as you are liable for the loan and you cannot be claimed as a dependent by your parents.
Education Tax Credits:
Extended by Congress through 2017, the American Opportunity Tax Credit allows students to claim a tax credit of up to $2,500 when they incur the costs of tuition, fees and course materials. Also, up to 40 percent of this credit ($1,000) is refundable, which means that you can get this money back even if you owe no tax. Alternatively, students can opt to claim a deduction for educations costs of up to $4,000. But for most students, the tax credit of $2,500 and the fact that almost half of it is refundable, makes the credit more valuable than the deduction.
Educator Expenses:
Teachers, who've paid for classroom supplies out of their own pocket, can claim those expenses as a tax deduction. You can claim up to $250 of your costs for supplies, materials, books, software, etc. What a lot of folks forget is that when both you and your spouse are teachers, you can both claim up to $250 of expenses for $500 total on a joint return. And if you paid for classroom supplies in excess of these limits, then the excess costs can be deducted as an employee business expense, which is a miscellaneous itemized deduction subject to threshold of 2% of adjusted gross income.
Moving Expenses:
If you moved to either take a new job or because your current job was relocated, then the out of pocket costs you paid for your move may be claimed as an adjustment to income. For these expenses to qualify there are tests for time and distance in connection with the move. For example, the new work location must be at least 50 miles away from your old home to qualify. The tests that apply and expenses that qualify are laid out on Form 3903, which must also be completed and included with your tax return.
Self Employment Tax:
The downside of being self-employed is that you have to pay the FICA tax as both an employee AND as an employer. This means that while your employee friends pay 7.65 percent towards this tax, you'll owe 15.3 percent on the net profit you report. The good news is that you can claim 50 percent of this tax you pay as an adjustment, which reduces your Adjusted Gross Income and that amount of income tax you owe.
Self-employed health insurance deduction:
If you're self-employed and pay the premiums for medical, dental and even qualifying long-term care insurance for you and your family, then you can claim these costs as an adjustment to income. So it's available to you even if you do not itemize deductions, or your other deductions are limited.
