The Land of Unknown Tax Deductions
Making sure you get every tax deduction and credit you have coming to you is one of the best ways to ensure you don’t leave any money on the table during tax time.
“Overlooking deductions can cost you money,” said Barbara Weltman, author of “J.K. Lasser’s 1001 Deductions and Tax Breaks 2012” and contributing editor of “J.K. Lasser's Your Income Tax 2012.”
What is to blame for missing these potentially valuable deductions? “There are a variety of reasons," Weltman said, "including last-minute filers and those who don't read the ‘what's new’ section of the instructions.”
Some often-overlooked deductions will “help you keep on top of your taxes so you can minimize your tax bill and, possibly, maximize your refund,” she said. Many of these deductions must exceed a certain percentage of your adjusted gross income to yield tax savings.
"Taxpayers who meet the requirements for a home office deduction should claim it." - Barbara Weltman, author of J.K. Lasser's Your Income Tax 2012”
The various costs involved in running your own business from a home office can be legitimate and valuable deductions. Weltman said taxpayers who operate businesses from home may always deduct the portion of household expenses related to the space used exclusively as a home office. However, she added, the deduction is often left off the tax form because the taxpayer is afraid it will lead to an audit.
“This fear probably is unfounded," Weltman said, adding that the IRS does not release statistics on its home office audits. "Taxpayers who meet the requirements for a home office deduction should claim it.” Just make sure you keep good records to support your claims.
Kevin O’Brien, who formerly taught in the School of Accountancy graduate program at the University of Denver in Colorado and now chairs DU’s Business Ethics and Legal Studies Department at the Daniels College of Business, acknowledged that an audit could result from home office deductions. However, he noted that costs such as high-speed Internet access and other expenses related to your computer are legitimate. So are car expenses and anything used exclusively for the business as long as they are attributable to your business and office space.
Another category of deductions often forgotten is unreimbursed employee business expenses. If your employer allows you to telecommute from home, for example, you may deduct part of the household expenses related to a space used exclusively as a home office, Weltman said.
“Employees must show that they work from home for their employers’ preference and not their own convenience,” she added.
One of these overlooked off-site working deductions, O’Brien said, is the cost of going from your home office to another work location. People also frequently forget to deduct expenses related to business. Anything required for work may be deductible, including the use of a personal vehicle for business, tools you have to buy to do a job, and work clothes. Weltman said any clothes you deduct must be only for work; if they're suitable for non-work situations, you can't claim them as a work expense.
Don’t forget about job-hunting expenses. Costs for resume preparation, mailing resumes, and travel for job interviews are deductible as miscellaneous itemized deductions, said Patricia Martin, a certified public accountant with Rudd, Martin & Brown PC of Denver.
Martin’s prize for the most lucrative overlooked potential deduction is the Higher Education Expense Deduction, which allows a married couple to write off up to $4,000 a year in qualifying higher education costs, mostly tuition.
“The income limits for it are higher than for the education credits, so some people who do not qualify for the credits can still take the deduction,” she said.
Unfortunately, this deduction, which doesn’t require that a taxpayer itemize, will not be available after 2011.
Another forgotten education deduction is the popular 529 plan for college savings, which is deductible on many states’ tax returns but not on federal returns, Martin said.
Weltman said taxpayers who itemize medical costs not covered by insurance need to check what the IRS has characterized as "qualified medical expenses" for that tax year.
As of 2012, Weltman said, qualified expenses include herbal supplements prescribed by a doctor to alleviate a medical condition, hormone therapy and sex reassignment surgery for someone afflicted with gender identity disorder, and batteries for hearing aids.
O'Brien said fertility treatments are also deductible.
“These treatments are expensive and will help in meeting the 7.5 percent of adjusted gross income threshold,” he said.
Remember, whatever your tax situation, TurboTax Deluxe, Premier, and Home & Business will ask simple questions and scour more than 350 deductions and credits to help you find those that apply to you.
Certified public accountant Patricia Martin, tax preparation book author Barbara Weltman, and University of Denver professor Kevin O’Brien offered these attention-capturing tax deductions:
Personal property taxes on vehicle registrations, often called ownership taxes and prior ownership taxes, are deductible, although they may be called by different names in different states, Martin said.
Many taxpayers don’t know about the saver’s credit, also known as the retirement savings contributions credit, which helps offset part of workers’ contributions to their IRAs, 401(k) plans and similar workplace retirement programs.
They also might not know that they may deduct alimony payments, but not child support payments.
Taxpayers who do volunteer work for a charity may deduct unreimbursed expenses, including the cost of the use of their personal vehicles.
Finally, just because you didn’t qualify for a deduction one year doesn’t mean you won’t qualify for it the next year. Many deductions are limited by your modified adjusted gross income, but the limits for some deductions may be adjusted annually based on inflation.