Top 10 overlooked tax deductions

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Top 10 overlooked tax deductions

No. 1. Homeowners' buried treasure

The mortgage interest deduction looms large in most homeowners' minds, but within that familiar category are gems that taxpayers often miss. For instance, while refinance loan points must be deducted over the loan's life, homeowners who refinance again can fully deduct the remaining points of the first loan.

"I've refinanced twice," said Martin Nissenbaum, national director of personal income tax planning at Ernst & Young. "On the second refinance, the points I paid on the first refinance become fully deductible in that year."

And those who used their new loan to remodel may be able to deduct those new points immediately. "If the proceeds of your new loan are used to improve your home, then you can deduct those points up front," said Jackie Perlman, senior tax research analyst with H&R Block.

No. 2. Forgotten interest

Even homeowners who didn't refinance should pay close attention to interest and real estate taxes paid, said Diane Kennedy, a CPA and author of "Loopholes of the Rich."

That's because mortgage lenders' penchant to sell loans to other banks means homeowners may miss some of the mortgage interest.

One client of Kennedy's made mortgage payments to four different banks last year, necessitating four different Forms 1098 detailing interest paid.

Some people "might not know to look for them all," she said. "Don't trust your 1098s and make sure you have enough of them."

Ditto for real estate taxes paid: Consider asking your tax assessor for a full accounting, Kennedy said.

No. 3. Many miscellany

Miscellaneous itemized and medical deductions are two of the more difficult categories to claim, given the minimum thresholds taxpayers must meet.

Taxpayers' miscellaneous itemized deductions must exceed 2 percent of adjusted gross income before deductions kick in. Still, little-known expenses can help you jump through that hoop:

  • Losses in a non-deductible IRA . If the value of your nondeductible IRA tanked and "the amount you took out was less than you actually put in, you can deduct the difference," Nissenbaum said. Say you converted $200,000 to a Roth. "You paid tax on $200,000, now it's $10,000 and you never expect it to come back again. You have a $190,000 deduction sitting there." Taxpayers must have cashed out all IRAs of a similar type to claim this deduction.
  • Investment-related costs. These include some magazine and investment newsletter subscriptions, account-management fees, IRA trustee fees and safe-deposit box costs are often deductible, as are tax-preparation costs, including tax software, electronic-filing fees and fees paid to a professional tax preparer.
  • Job-seeking expenses . Resume printing, travel, telephone calls and networking expenses for a job in your field count as deductible. "Many people don't realize they're deductible even if they don't find a job," Nissenbaum said. There must be a direct connection between the expense and the job hunt.
  • Legal fees for matters involving taxable income . If you win a harassment lawsuit, Perlman said, "That's taxable income to you, so the legal fees are deductible." Also deductible: Fees related to collecting alimony.
No. 4. Job-related deductions

Self-employed people aren't the only workers able to take job-related deductions. The key for employees is not claiming any expense that your employer would have reimbursed had you only filed an expense report.

For instance, continuing education for your job is deductible, Perlman said. "The word 'continuing' is very important. This cannot be training for a new position," she said. "If I want to take a legal-research course that enhances my ability to do tax research and if my company doesn't pay for it, that is a deductible expense for me."

Union and professional association dues are deductible, as is mileage for business trips (other than commuting).

If you use your cell phone for work and pleasure, the portion related to work -- including the base charges, long distance or roaming charges, and the cell phone purchase -- may be deductible, Brucker said.

No. 5. State-tax deductions

State and local taxes levied on personal property, such as car or boat registration fees, are often deductible on your federal form.

Remember, though, that the tax must be assessed annually and based on the value of the property. That's not true for, say, car registration fees in every state.

Also, remember deductions on state income tax forms (some states allow itemization). "New York has a tuition deduction for people who pay college tuition -- that's missed many times," said Barry Picker, a CPA based in Brooklyn.

No. 6. Medical-expense deductions

Self-employed people won't want to miss the above-the-line deduction for 100 percent of health-insurance premiums, up from 70 percent last year.

But for people struggling to exceed the 7.5 percent threshold for itemized medical bills, remember that retirement-home costs related to medical services are deductible, Nissenbaum said.

Plus, contact lenses, eyeglasses, hearing devices, prescription contraceptives, insulin and hospital services fees, such as lab work, are commonly-missed deductions, as are transportation costs to and from medical appointments. (The mileage rate currently is 12 cents a mile.)

No. 7. Deductions for non-itemizers, too

Even non-itemizers can shave thousands off taxable income through "above-the-line" deductions, which reduce taxable income without itemizing on the dreaded Schedule A.

Moving expenses have moved up from an itemized deduction to an above-the-line deduction, available to those whose new job is 50 miles further away from their old house than their old job was. Also, your costs can't already be covered by your employer.

Any alimony paid is also above-the-line, as is the bank penalty for early savings withdrawals. "If you have a CD at a local bank and you withdraw that CD before its maturity date, you're going to be slapped with a penalty by the bank," Brucker said. "That happens to be deductible."

No. 8. Payback for scholars

Students, past and present, are big winners in above-the-line deductions. "One of the real heavy hitters there is the student-loan interest deduction, which is up to $2,500," Perlman said.

And taxpayers in school, or with a spouse or kids in college, can take an above-the-line tuition-and-fees deduction for up to $3,000.

While one student can't claim both the tuition deduction and education credits, a family of learners can divvy up the savings.

"Maybe you have one freshman, one senior and mom or dad are taking some college courses: You might want the Hope credit for the freshman, lifetime learning for the senior and the tuition-and-fees deduction for mom or dad," Perlman said.

No. 9. The hidden deductions

Most above-the-line deductions become fairly obvious as you travel line by line through Form 1040, but as the tax code gets more complex and space on the form becomes premium, some deductions are harder to see.

For instance, teachers working 900 hours per school year can offset the costs of books and other classroom materials with a $250 deduction, a write-in claim at Line 33.

Ecologically minded drivers can earn a $2,000 above-the-line deduction for some hybrid cars, also claimed at Line 33.

Jury fees that you had to forfeit to your employer are also deductible at Line 33. And some performing artists can deduct their job-related expenses there, too, said Cindy Hockenberry, information coordinator at the National Association of Tax Professionals.

No. 10. More than one form of charity

While most taxpayers know to deduct charitable contributions, most fail to reap their full benefit, experts said. While donating that pile of old clothes may offer relief enough in and of itself, it could also reduce your tax bill.

"People forget about the two bucks here and the two bucks there that they pay out. They also forget about the time they bring that big bag down to the Salvation Army," Kahan said.

Mileage related to volunteer activity is deductible at 14 cents a mile, but remember: The value of volunteer services rendered is not deductible.

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