Tax season is drawing to a close and if you’ve waited to file your return because you anticipate owing money to the IRS, then you’ll want to make sure to claim all available tax breaks before you push the send button on your electronic return. To help you with this process, here are some tax breaks that you may have overlooked.
1. Itemize your deductions instead of taking the standard deduction.
If you take the standard deduction in your hurry to get your tax return done, you might be missing out on some key deductions. Itemizing your deductions can reduce your tax burden. The main categories are medical and dental expenses, state and local sales or income taxes, mortgage interest you paid, charitable contributions, casualty and theft losses, and job and miscellaneous expenses, tax preparation fees and gambling losses (yes, you can deduct the cost of those losing bingo, lottery and raffle tickets that you bought).
Remember, however, that you can’t just claim these expenses. You have to keep canceled checks, financial statements, receipts and any other evidence needed to prove that you actually are entitled to these tax breaks. If you need time to find all the receipts, then you should ask the IRS for a six-month extension to file. You still have to pay your estimated taxes by April 15 to avoid a penalty, but you’ll have until October to find all the paperwork needed to file your return.
Also, some of these items fall under the rule that you can only deduct them if they exceed 2 percent of your adjusted gross income. Examples are for job search costs, union dues, tax preparation fees, and fees paid to keep a safe deposit box (these fees aren’t deductible if all you’ve put in there is your jewelry or other personal items). IRS publication 529 explains it all.
You can deduct medical costs if they’re more than 10 percent of your adjusted gross income (7.5 percent if you’re 65 or older) but only the amount that’s above that threshold. You can deduct basic medical costs, such as doctor visits, deductibles, and your co-pay, and also less common costs, such as the cost to get to the doctor or to the pharmacy to pick up your medicine. Take a look at tax journalist Kay Bell’s March 20 post at “Don’t Mess with Taxes” for more insights on these deductions.
If you searched for a job last year in your existing field, then you may be entitled to deduct expenses such as employment agency fees (but only if your employer doesn’t pay them), amounts spent preparing and mailing your resume, and travel expenses related to the job hunt.
You may deduct either the state and local general sales taxes or the state and local income tax, but not both. You may also be able to deduct state and local taxes on your personal property (e.g., your car or boat) under certain conditions.
Take a look at the IRS instructions for Schedule A (Itemized Deductions) or use the IRS online tax assistance for help.
Alternatively, since the IRS instructions are pretty dense, you might want to turn to the Tax Policy Center’s interactive tax guide to find clear explanations of these items before you start trying to figure out your itemized expenses.
2. Your children may entitle you to education and dependent child tax benefits.
The main education benefits come from the American opportunity credit — this credit can be as high as $2,500 for qualified education expenses for each eligible student and is partially refundable — and the lifetime learning credit that can go up to $2,000 per eligible student. You can’t double-dip, however.
You may also be able to cut your tax bill if you paid interest on a student loan, paid tuition or fees, or participated in a qualified tuition program, also known as a “529 plan.” While contributions to 529 plans aren’t tax deductible, you don’t pay tax on accumulated earnings and, as long any funds you withdraw go toward qualified college expenses, they’re not taxable either. You need to be careful with your 529 plan and not withdraw more than you paid for your child’s qualified higher education expenses. If you do, you will have to pay taxes and a penalty. Likewise, you can’t claim expenses for the 529 plan if you’ve already used them for the other education credits.
This means that even if your children are still in diapers, if you expect them to go to college, then you should open a 529 account now.
The child tax credit provides similar benefits. Families can obtain a credit up to $1,000 for each dependent child under age 17. This credit is partially refundable and phases out as income increases.
3. Are you eligible for specific credits, such as the earned income tax credit or the retirement savings contribution credit?
The earned income credit is designed to encourage work and to offset taxes for low-income workers. It’s also refundable so that if the credit is greater than your tax liability, you’ll get money back from the IRS. According to the Center on Budget and Policy Priorities, the average EITC was just under $3,000 for a family with children in tax year 2012.
You probably already know that you have until April 15 to make your tax-deductible IRA contribution for 2014. What you might not know is that if your income is low enough (adjusted gross income below $60,000 for a married couple), then you are also eligible for up to $2,000 in the retirement saver’s credit. You won’t get a refund if the credit is more than your taxes due and any credit is reduced by any distributions you have received, but claiming this credit doesn’t affect your ability to deduct your IRA contributions.
The IRS has a good explanation of the saver’s credit.
4. Have you taken advantage of all available state and local tax breaks?
In the District of Columbia, for example, if you meet the income test, you are entitled to a homeowner and renter property tax credit. This credit has been around essentially unchanged since 1977, according to the DC Fiscal Policy Institute. But, in 2013, the D.C. government raised the income limit to $40,000 from $20,000 and increased the credit to $1,000 from $750. Like the EITC, this credit is refundable.
Is your state one of the 25 states plus the District of Columbia that has an EITC? Depending on your income level and total tax bill, these credits will reduce your tax bill dollar for dollar. Some of them, like the EITC, are refundable and can give you money back if the credit exceeds your tax liability.
5. If you haven’t yet filed your 2011 tax return, do it before April 15.
Maybe you didn’t file a return that year because you didn’t earn enough money to have to file a return. However, you might have had taxes withheld from your earnings, but you can get this money back only if you file a return and only if you file it within three years of when it was originally due. This means that if you haven’t yet filed your 2011 tax return and you are entitled to a tax refund, then you must file that 2011 return before April 15. If you don’t, then your refund will go to the U.S. Treasury Department. The IRS has about $1 billion in unclaimed refunds, or almost $700 for the median taxpayer.
Likewise, if you’re expecting a refund in the mail and it hasn’t yet arrived, then you should go on to the IRS’ website and check for “Where’s my Refund?” This could happen if you moved without telling the IRS or the post office, then the check will be returned to the IRS.