Each year, the complexities of our tax code cause many taxpayers to leave money on the table when filing their returns. As they say, you must pay taxes but you don’t have to leave a tip.
Failing to take tax deductions you are entitled to can be costly, resulting in the loss of income that could have been applied toward other financial goals such as retirement planning, education funding or paying down debt. The commonly overlooked deductions noted below may help to minimize your tax liability this season.
Medical expenses: Differences between federal and state deductibility thresholds often lead taxpayers to overlook medical deductions. According to Marguerite L. Mount, CPA with The Mercadien Group, “When individuals think about itemized deductions they often don’t even consider the medical deduction — primarily because they have to exceed the Federal threshold limit of 7.5 percent to 10 percent (depending on income and age) of adjusted gross income, which usually means a catastrophic medical expense.
What they lose sight of is if they are a N.J. resident, medical expenses are deductible if they exceed 2 percent of N.J. adjusted income.” Remember, federal and state tax laws do not mirror one another and significant differences can exist. Also keep in mind that expenses for medical travel including parking, tolls and medical mileage may also be deductible.
Deductions for the care of children or an aging parent: Are you incurring expenses to care for a child or other dependent so that you and your spouse (if you are married) can work or go to school? If so, the commonly overlooked child and dependent care credit, which ranges from 20 to 35 percent of eligible expenses, may be available.
While the credit gradually declines for taxpayers depending on income, a minimum 20 percent credit is generally available for even higher income taxpayers. The credit is available if the care is provided to one or more qualifying persons who are defined by the IRS as being a dependent child age 12 or younger when the care was provided, or other individuals who are physically or mentally incapable of self care regardless of age.
Up to $3,000 in expenses for one qualifying individual or $6,000 for two or more qualifying individuals is considered in calculating the credit. Since a tax credit can be more valuable than a deduction, be sure to determine if you qualify. Consider reviewing IRS Publication 503, Child and Dependent Care Expenses for more information.
Energy saving home improvements: Up to 10 percent of the cost of certain energy saving property that you added to your primary home may qualify for a credit. This includes the cost of qualified insulation, windows, doors and roofs. This credit has a maximum lifetime limit of $500 and only $200 of this limit applies for window installations.
Unless extended again by Congress, the $500 credit will not be available for purchases made after 2013. For homeowners really going “green,” the Residential Energy Efficient Property Credit (available until 2016) of 30 percent is available to help offset the cost of alternative energy equipment that you installed on or in your home. Qualified equipment includes solar hot water heaters, solar electric equipment and wind turbines. This credit is available through 2016.
Charitable deductions: While taxpayers are more likely to maintain careful records for large charitable donations, small donations often slip through the cracks. From donations at retail checkouts and religious groups to clothing and furniture items, smaller donations can really add up over time.
In addition to donations, there may be other missed deduction opportunities when it comes to serving a charity. Marguerite L. Mount, CPA adds, “While time spent providing services to a qualified charitable organization is not deductible, taxpayers often overlook the deductibility of any unreimbursed out-of-pocket costs incurred rendering the service.
These costs could include uniforms, telephone charges, equipment and travel including mileage.” The deduction for mileage is 14 cents per mile. It is critical to maintain proper records so that you can substantiate any deductions you plan on taking. Review IRS Publication 526 for more information.
Mortgage points: It is not uncommon to pay points when obtaining a loan for the initial purchase or refinance of your home. While paying points in order to receive a lower interest rate may not always be in your best interest, if you did pay points, a portion of the cost may be deductible.
According to the IRS, the term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage and could also be called loan origination fees, maximum loan charges, loan discount or discount points.
Deductibility rules vary depending on whether it is a refinance or initial purchase. If you refinanced your mortgage and paid points, a 20 year loan may allow for 1/20th of the points paid to be deducted each year. If you did not refinance an existing loan and took out an initial mortgage, you may be able to deduct the costs in one lump sum. See IRS publication 936 for additional information.
While it is not difficult to be tripped up by the complexities of our tax code, doing your homework and working with a professional can help clear up any confusion.
Since everyone’s situation is unique, consider speaking to your tax adviser to ensure that you are taking a proactive approach to reducing your taxes this year.
Kurt J. Rossi, MBA, is a Certified Financial Planner Practitioner & Wealth Advisor. He can be reached for questions at (732) 280-7550, kurt.rossi@Independentwm.com or www.Independentwm.com. LPL Financial Member FINRA/SIPC.
