You Can Shave More Off Taxes Than You Think

Posted by Burroughs, Moreland & Mudd CPA
Bay Leader

Photo by elNico

To say that Federal income tax law is complex is like saying the Chesapeake Bay is a pretty big bucket of water.

It’s easy to look at the myriad deductions and credits and feel your eyes glazing with a thin crust of discouragement. That reaction, while normal, could be detrimental to your wallet. Here are a few often overlooked deductions for which you may want to consider finding the paperwork:

• Reinvested dividends – If your mutual fund dividends are automatically used to buy extra shares, remember that each reinvestment increases your tax basis in the fund. That, in turn, reduces the taxable capital gain when you redeem shares. Forgetting to include the reinvested dividends in your basis results is double taxation of the dividends – once when they were paid out and immediately reinvested in more shares and later when they’re included in the proceeds of the sale.
• Out of pocket charitable contributions – Little things add up. Keep your receipts, and, if your contribution totals more than $250, you’ll need an acknowledgement from the charity documenting the support you provided.
• Student loans paid by parents – Students can deduct their loan interest, even if the loans were paid by mom and dad. The IRS considers the parents’ payment a gift to the student.
• Job hunting costs – If you’re unemployed and looking for a position in the same line of work, you can deduct job-hunting costs as miscellaneous expenses if you itemize, even if you didn’t land a new job. Your total miscellaneous expenses must exceed 2 percent of your adjusted gross income.
• Job moving expenses – Although job-hunting expenses are not deductible when looking for your first job, moving expenses to get to that job are. You can write this off, even if you don’t itemize. To qualify for the deduction, your first job must be at least 50 miles away from your old home.
• Military reserve travel expenses – Members of the National Guard or military reserve may deduct for travel expenses to drills or meetings. To qualify, you must travel more than 100 miles from home and be away from home overnight.
• Medicare premiums (for self-employed) – Folks who continue to run their own businesses after qualifying for Medicare can deduct the premiums they pay for Medicare Part B and Medicare Part D and the cost of supplemental Medicare (medigap) policies.
• Child care credit – You can qualify for a tax credit worth between 20 percent and 35 percent of what you pay for child care while you work.
• Refinancing points – When you refinance, you have to deduct the points on the new loan over the life of that 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. It may not be much, but don’t throw it away.
• Baggage fees – If you’re self-employed and traveling on business, be sure to add airline baggage fees to your deductible travel expenses.
• Energy-saving home improvements – They’re not all gone. These credits effectively refund 30 percent of the cost (including labor) of installing qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines.
• Transit subsidy – Last year, folks who drove to work could receive up to $240 tax-free from their employers to cover the cost of parking. However, workers who used mass transit were limited to $125 a month tax-free to pay for their bus, subway and train rides to the job. The new tax law brings parity to the tax break, hiking the tax-free limit for transit expenses to $240, retroactive to January 2012.

If you want thorough and professional help getting all the deductions and exemptions for which you are eligible, contact Burroughs, Moreland & Mudd, CPA of Charlotte Hall, Maryland at 301-884-4641.