The question at tax time I hear the most starts off “Can I deduct…..? I have to admit that more often than not the answer is ‘no.’ But that doesn’t mean there aren’t a lot of rarely used tax deductions out there that are often missed, largely because people don’t even know that the deduction exists. Here are examples of 5 that I find more often than not get overlooked:
- Mileage deduction incurred while working on behalf of a qualified charity. A taxpayer cannot deduct the value of their time contributed to a charity. They can however deduct the mileage they incur driving their vehicle on behalf of that charity at the rate of 14 cents/mile. Those miles can add up if the commitment is an ongoing to such things as church youth groups, elder care, etc.
- Last year’s state income tax bill paid in the current year. The focus when pulling together tax information usually involves deducting payments specific to that tax year. Often forgotten is the fact that if you paid state income tax when your tax return was due, you can deduct that tax payment in the current year even though it relates to the prior year’s tax. This is because most individuals are “cash basis” which
means expenditures are deducted in the year they are paid. If, in April 2012 you paid $500 due when you filed your 2011 tax return, you can deduct that payment in 2012. Another related and often missed deduction is the 4th quarter estimated tax payment made to a state which is due and thus paid in January of the following year. When looking at any deduction, taxpayers should think in terms of when the deduction was paid, not so much what year or period it was related to. For a charitable deduction, making a pledge to contribute isn’t deductible when you pledge, it becomes deductible when you actually write and send the check. - Deductible expenses paid when closing on or refinancing you principal residence. When a taxpayer closes on their new home, or when they refinance, often a number of expenses are paid that get missed when it comes time to file their tax return. The most common missed expense is property taxes. At closing property taxes are often charged to both the buyer and seller for the taxes that are either unpaid at that time or represent the share of taxes they are responsible as of closing. These do not show up on any IRS form provided to the taxpayer. You should keep a copy of the reconciliation of monies (Often called the “HUD Statement”) paid and received at closing and provide it to your tax preparer. There also may be points or other deductible assessments.
- Long-term care insurance. As the cost of health care becomes a real concern for people, more are turning to purchasing long-term care policies to protect them from these potentially disastrous costs, particularly when they are older. The premiums for these policies are deductible, subject to limitations based on age when paid. These expenditures are considered medical expenses and thus subject to the 7.5% AGI floor for most. However, self-employed folks can fully deduct these payments like they do their health insurance premiums.
- Reinvested dividends. This is not so much a tax deduction but a tax adjustment that many taxpayers miss. When you buy a mutual fund, usually the dividends of that mutual fund are reinvested in more shares. You still pay tax on those dividends even though you don’t get the money. What gets missed is those reinvested dividends become part of the cost of those shares when figuring the gain if you sell, thus reducing your tax. For example if you invest in a mutual fund with $5,000 and over the next 3 years receive $200 in dividends you reinvest in more shares, if you sell those shares your cost basis is $5,200. Being sure to account for those reinvestments can save a lot of money!