Overlooked Tax Deductions

Last Updated Jul 20, 2010 4:33 PM EDT

Quick, which sounds worse?

  • Colonoscopy
  • Wisdom tooth extraction
  • Tax preparation and filing

Took a few moments to choose, didn't it? I am sorry to be the bearer of bad news, but with the 2008 tax return deadline nearly here, it's (past) time to get cracking! Claim these often overlooked deductions and credits and you just might be able to pay less to the IRS.

Make an IRA contribution

When you contribute to an individual retirement account, you help fund a future goal while lowering your current tax bill. In other words, socking cash in an IRA is like saving with help from your uncle, Sam.

The rules are pretty simple: you have until Wednesday, April 15 to contribute up to $5,000 to a 2008 IRA ($6,000 if you are 50 or older). If you are self-employed, have a Keogh or SEP-IRA, and have filed for an extension to October 15, you can even wait until then to put 2008 money into those accounts.

Even if you’re covered by a retirement plan at work, you can deduct some or all of your IRA contribution if you are single and your income is $63,000 or less ($105,000 or less if married). If you are not covered by a workplace retirement plan but are married to someone who is, you can deduct some or all of your IRA contribution if your joint income is $169,000 or less.

Deduct property taxes even if you won’t itemize

If you won’t be itemizing your deductions but did pay property taxes in 2008, don’t miss this new break: an extra standard deduction to offset those taxes. Individuals can claim up to $500, and married couples up to $1,000.

Get the credit(s) you deserve

Tax credits are even better than deductions, because they lower your taxes dollar for dollar, instead of being calculated based on your tax bracket. So don’t miss any! See if you qualify for these credits before filing your 2008 return:

  • The Child Tax Credit is up to $1,000 for each qualifying child under age 17. This credit can be claimed in addition to the credit for child and dependent care expenses. (Details are in IRS Publication 972.)
  • The Earned Income Tax Credit is a refundable credit of up to $4,824 for married couples filing jointly with 2008 earned income under $41,646 and singles with income under $38,646.Your income and family size determine the amount of the credit. (Details are in IRS Publication 596.)
  • The Child and Dependent Care Credit of up to $600 per child or $1,200 for two or more children is calculated based on your expenses paid for the care of your kids under age 13 to enable you to work or to look for work in 2008. The credit is 20 to 35 percent of your child-care expenses — the size of your credit depends on your income. (Details are in IRS Publication 503.)
  • The Retirement Savings Contributions Credit is designed to help low- and moderate-income workers save for retirement. Individuals with incomes of up to $26,500 and married couples with joint incomes of up to $53,000 may qualify for a credit of up to $1,000 per person on the first $2,000 of retirement savings. Check out Form 8880 for the rules.
  • The First Time Homebuyer Credit lets you claim a credit of 10 percent of the purchase price, up to $7,500 if you’re married filing jointly or $3,750 for singles. To qualify, you must not have owned a principal residence in the U.S. during the three years that ended on your purchase date and you had to have bought the home between April 9, 2008, and January 1, 2009. Plus: 2008 income had to be below $75,000 for single filers and $150,000 for married taxpayers filing jointly. For details, see Form 5405. This credit is $8,000 for 2009 purchases.

Add up those itemized deductions

If your deductible expenses exceed the 2008 standard deduction of $5,450 for singles and $10,900 for married couples filing jointly, be sure you itemize and grab those write-offs. For 2008 (and again for 2009) you can boost your standard deduction by up to $500 of the property taxes paid if you file as a single person; up to $1,000 if you file jointly. Three worth checking out:

  • Miscellaneous deductions: They are deductible if they total more than 2 percent of your adjusted gross income. They include tax-preparation fees, job-hunting expenses, business car expenses, and professional dues.
  • Sales taxes: You can deduct sales tax paid in 2008 if the amount was greater than the state and local income taxes you paid. In other words, you choose: write off your sales taxes or write off your income taxes. If you didn’t keep your sales-tax receipts, use the IRS’s sales tax deduction estimator . Even if you claim the sales tax amount from the IRS tables, you can add in tax paid on vehicles or boats purchased during the year, except to the extent the sales tax rate on them is more than the general sales tax rate. If you live in a state with a high income tax, like California or New York, you will probably be better off claiming your state and local income taxes rather than sales taxes. If you live in a state with no income tax, like Florida, Texas, or Washington, be sure to take the sales tax deduction when you itemize.
  • Medical expenses: This one is hard to claim, because the bar is so high to qualify. You can only deduct the portion of your 2008 medical expenses that exceed 7.5 percent of your adjusted gross income.
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    Jill Schlesinger, CFP®, is the Emmy-nominated, Business Analyst for CBS News. She covers the economy, markets, investing and anything else with a dollar sign on TV, radio (including her nationally syndicated radio show), the web and her blog, "Jill on Money." Prior to her second career at CBS, Jill spent 14 years as the co-owner and Chief Investment Officer for an independent investment advisory firm. She began her career as a self-employed options trader on the Commodities Exchange of New York, following her graduation from Brown University.