Whether you love them or despise them, taxes are one of life's only two sure things, at least according to Benjamin Franklin.
But for many, having taxes taken out of their paycheck on a weekly, bi-weekly, or monthly basis is their only form of savings during the year. Although the personal savings rate in the U.S. of 4.2% is off its historic lows, relative to other nations around the world it's pretty low. This means that despite the unpopularity of taxes, they can deliver quite a pop to a number of Americans come February, when tax refunds begin to trickle in.
Yet for all the different types of tax deductions and credits available, each and every year millions of Americans, even those with the help of tax-prepping software or the assistance of a tax professional, will miss a deduction or credit that they are entitled to. You can blame a lot of this on the tax code, which changes every year, as well as the fact that the U.S. tax code would require nearly 74,000 regular 8.5-by-11-inch printed pages to explain, based on statistics from the CCH Standard Federal Tax Reporter.
With that in mind, today I want to examine seven commonly overlooked tax deductions and credits that you should be especially on the lookout for when you file your taxes for the previous year on or before April 15. Here they are, in no particular order.
1. Energy-efficient home improvements
Have you ever completed any home-improvement projects that made your home more energy efficient? Perhaps new insulated windows, new doors, or a new roof? The good news is the Non-Business Energy Property Credit allows you to claim up to 10% the cost of these repairs (with windows not to exceed a $200 credit) up to a maximum lifetime credit of $500. In other words, if you claimed $300 on this credit in 2011, you may still claim up to an additional $200, but as the IRS's website warns, be careful to ensure that you have the manufacturer's credit certification statement. Otherwise, the improvement may not qualify.
In addition, the Residential Energy Efficient Property Credit, which runs through 2016, allows you to write off 30% of your costs to put alternative energy equipment in your home, such as solar water heaters or wind turbines. There is no limit on the tax credit you can receive here, and better yet, you can carry the credit forward until it's used up.
2. Self-employed health insurance premiums
Taxes for self-employed people can be confusing even with the help of tax preparation software -- trust me, I speak from experience -- but one commonly overlooked deduction that self-employed people often miss are health insurance premiums.
For non-self-employed people, health, dental, and other medical expenses need to equate to at least 7.5% of adjusted gross income before they receive any sort of benefit. For practically all self-employed people, this rule doesn't apply. In fact, most won't even need to itemize their deductions, like non-self-employed people. Instead, they can simply deduct all medical and dental expenses paid out of their own pocket in 2013 and reap the rewards of their self-employment.
3. Casualty, disaster, and theft losses
Have you ever been the victim of a natural disaster such as an earthquake or tornado, or had items stolen from you? If the answer is yes, you may be eligible to claim these different types of losses on your tax return. Also, if you're in a city or county that's been declared a federal disaster area, then you're automatically eligible to claim this loss.
Now keep in mind that not all losses are considered eligible to be claimed on your tax return. If it's a loss that's created by normal wear and tear, you can forget about it! Similarly, if your insurance company provides you with a reimbursement on your loss, the most you can do is claim the difference on the reimbursement value versus what the item was currently valued at (if there's even a discrepancy in the first place).
4. State sales tax deductions
Most people in the U.S. pay a state income tax and get some form of deduction when they file their taxes based on that state income tax. However, in states that have high state sales taxes, or no income tax at all, some people are overlooking the ability to itemize their sales tax deduction for significantly larger savings.
Tax-prepping software that uses pre-determined IRS calculations will often choose a sales tax deduction value based on your income. However, sales tax paid on just a couple of big-ticket items could be enough to tip the scales heavily in favor of itemizing your taxes to claim a much bigger deduction.
5. Caring for a parent
Most people are aware of their ability to claim tax credits for child care, but many often forget that they can also claim a total annual expenses benefit of $3,000 when it comes to taking care of a parent.
According to the IRS, this credit is based on a percentage of the amount of work-related expenses you pay to a caregiver to take care of your parent. The IRS qualifies this Dependent Care Credit as any spouse or dependents who are physically or mentally incapable of taking care of themselves and who spend at least eight hours per day in your household, and the deduction is based on your annual income.
6. Refinancing points
Did you purchase a home or refinance your loan sometime in the past year, or two ... or 10? If you paid points on your mortgage or loan, then you may be entitled to amortize these points over the life of your loan.
For example, let's assume you paid $3,600 in "points" when you purchased your home. Unfortunately, you can't deduct the $3,600 upfront, since those fees were incorporated into the life of your loan. However, you'll be allowed to deduct a maximum of $120 per year on your taxes over the life of the 30-year loan as well as the full balance remaining on your points if you decide to pay off your loan early.
7. Earned Income Tax Credit
Finally, the Earned Income Tax Credit, or EITC, is a benefit given to American workers who have low-to-moderate income, which helps reduce their taxable income and may even result in a refund.
It might seem like common sense for taxpayers to look toward this deduction, since it's been around for years, but the IRS notes that a whopping 20% to 25% of qualified individuals aren't receiving this benefit. One reason, of course, is that you have to file a tax return with the IRS for the EITC even if you owe no tax or aren't normally required to file a return, and we know this probably isn't being done. There are strict limits on who qualifies for the EITC based on their adjusted-gross income, which can be viewed here for 2013.
In addition to tax refunds, Social Security is a primary driver of retirement income. Are you using this social tool to your advantage?
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