There are a lot of lines on that tax return of yours. Have you researched each and every one, making sure you're taking advantage of all the legal ways you can cut your tax bill? Not many people do. Even some tax professionals miss opportunities to reduce a taxpayer's tab.
Have no fear -- the Fool is here, giving you the scoop on the top 10 most overlooked tax credits and deductions. Drumroll, please...
1. Educator expenses
If you're a teacher or school administrator, you just might qualify for a deduction that will allow you to reduce your taxable income. According to a recent study by the National Education Association, the average K-12 teacher spends approximately $400 annually out of her own pocket for classroom supplies. In the past, many teachers would take those expenses as deductions on their tax returns as "miscellaneous itemized deductions." But since only those miscellaneous itemized deductions that exceed 2% of adjusted gross income (AGI) reduce taxable income, most teachers didn't see any benefit.
However, there is an "above the line" deduction available to certain teachers and administrators that allow for a $250 deduction for qualified supplies. Check out line 23 on Form 1040 or line 16 of Form 1040A. You don't have to itemize your deductions to claim this deduction, and there are no income limitations.
2. Retirement savings contribution credit
If you make a contribution to virtually any retirement account (e.g., IRA, 401(k), 403(b), 457), you may be eligible for this credit. You really have to dig for this one, since most people won't even look at the retirement contribution information reported on their W-2 forms. Even if you use a computer program -- such as Intuit's
And don't forget: You still have until April 15, 2004, to make a 2003 contribution to your IRA. Visit our IRA Center for details.
3. Self-employed health insurance
If you're self-employed and pay qualified health-insurance premiums, you will find a nice surprise on Form 1040, line 28. For 2003 you may be eligible to deduct 100% of your qualified health-insurance premiums (up from 65% last year). Review the instructions for this deduction since it can get a bit tricky. But if you qualify for this deduction, it'll save you a bunch of money as compared to taking these expenses as a medical deduction on your itemized deduction schedule.
4. Student loan interest deduction
This is another way to reduce your taxes without having to itemize your deductions. As you are likely aware, most interest paid for personal expenses is no longer deductible. But the Congress has carved out an exception for student loan interest. And you don't have to use Schedule A in order to claim this little gem. There are income limitations, and if your student loans are large, it's possible you won't receive a deduction for all the interest that you paid. But for the majority of taxpayers, this is an overlooked way to lower your tax bite.
5. Loan points
Did you overlook the deduction for the points that you paid on that new loan? Many people do. Generally, the points that you pay for a loan on a new purchase are immediately deductible, while those paid for a refinance of an existing loan must be deducted on a pro-rata basis (amortized) over the life of the loan. But once that loan is repaid (normally through selling the home or another refinance), the unamortized portion of the loan points can be immediately deducted.
6. Tuition and fees deduction
The education credits aren't the only ways you can shave a few dollars off of your tax liability. If you're taking qualified college courses, it's possible that you can claim a deduction for these expenses. While there are income limitations, it's another "above the line" deduction that you can claim even if you don't itemize your deductions on Schedule A.
7. Adoption credits
Uncle Sam understands that adoption proceedings can be an expensive undertaking, which is why the Small Business Job Protection Act created a nonrefundable credit for qualified adoption expenses and a new exclusion for employer-provided adoption assistance programs. Congress created these new tax benefits out of a belief that financial costs should not be a barrier to adoption, and to encourage the adoption of children with special needs. This could lead to as much as a $10,000 tax credit for those who have incurred qualified adoption expenses.
8. Worthless stock
How about those shares of stock that you bought with high hopes, only to see the down payment on your dreams crash and burn? Many are still not aware that a deduction is allowed for those worthless shares. Even if your stubs aren't technically worthless, selling them to a non-related person (such as an in-law) will allow for the deduction in the year of sale.
9. Credit card payments
Did you buy your business computer near the end of the year and charge it? Did you use your credit card to donate to your favorite charity during the holidays? You might think that you have to wait until you pay that credit card bill before you can take the deduction, but that's not the case. The IRS treats a credit card charge like any other loan, so you receive the deduction in the year that the charge was made, not in the year that the credit card bill was paid.
10. Charitable and medical travel
Do you use your auto for charitable purposes? If so, you can deduct 14 cents per mile for all qualified charitable travel. Not only that, you can deduct your out-of-pocket expenses when you are serving a qualified organization. For example, Scout leaders can deduct the cost of uniforms. But what you can't deduct is the value of your time that you donate to a charitable cause.
It's likely that you also use your auto for medical travel, such as to and from your doctor and dentist visits. For 2003, medical travel is 12 cents per mile. And if you have to travel a great distance for medical treatment, the actual cost of the travel (such as airfare) and lodging can also be deductible.
It's not too late
Did you miss any of these deductions? Hopefully not. But if you did, you can always file an amended tax return to recoup your overpaid taxes.
Roy Lewis lives in a trailer down by the river and is a motivational speaker when not dealing with tax issues and he understands that The Motley Fool is all about investors writing for investors. You can take a look at the stocks he owns as long as you promise not to ask him which stock to buy. He'll be glad to help you compute your gain or loss when you finally sell a stock, though.