There's no way around it: Paying taxes hurts. Sure, we get a little thing called "civilization" in return -- police, schools, roads, courts, parks, and more. But nonetheless, most of us would like to pay as little as we need to. Fortunately, you may be able to shave a lot of dollars off your bill by taking advantage of some often-overlooked tax breaks.
Extra help for homeowners
Given extremely low interest rates in recent years, many people have refinanced their mortgages, giving them fresh mortgage interest to deduct. But did you know you may also be able to deduct part of any points you paid on the new mortgage, provided you used some of the money you saved in order to improve your home?
Furthermore, if you boost the energy efficiency of your home, 2010 is the last year in which you may be able to take a credit of up to $1,500 via IRS Form 5695. Remember, a tax credit reduces your tax bill dollar for dollar, so it's far more valuable than a deduction.
Economic ramifications
With our economy struggling, many people are either underemployed or overemployed, working two jobs to try to make ends meet. There are tax breaks for both camps.
If you earned money in 2010, but didn't exceed particular thresholds that depend on the size of your family, you may qualify for the Earned Income Tax Credit, which can reduce your tax bill by as much as $5,666.
Meanwhile, if you've been working two jobs, there's a chance that you've been overpaying your Social Security (FICA) taxes. If you paid more than $6,621.60 in 2010 in Social Security taxes, you're due a tax credit.
Changing your job can trigger tax opportunities, too. If you incur expenses looking for a new job in your current profession, you may be able to deduct the portion of them that exceed 2% of your adjusted gross income (AGI). Qualifying expenses can include the use of outplacement agencies, resume preparation, postage, and phone calls. Note that if you're entering the job market for the first time or are changing fields, this won't apply.
However, first-time workers and seasoned veterans alike can qualify to deduct moving expenses, if the move is in order to take a new job.
And if you're a moderate- or low-income worker who has managed to sock away money into an IRA or a workplace account such as a 401(k), you may be able to get a tax credit of 50% of your contributions, with the credit capped at $1,000. That's kind of huge: Contribute $2,000, get a tax credit of $1,000, and voila -- you just reaped a massive 50% return on your money!
Family affairs
Obviously, if you support a dependent child, you can claim an exemption for him or her. But children are not the only dependents that can qualify -- so can adults. If you're taking care of your parents, for example, you may be able to deduct as much as $3,650 per person in 2010. To qualify, the dependent shouldn't have income greater than that $3,650 (not including Social Security) and you should be paying for at least half the person's living expenses.
Meanwhile, don't forget that when claiming the Child and Dependent Care Credit for, say, after-school programs, you can also claim some summer camp expenses. (The same credit applies to adult dependents, too, if you're paying anyone to care for your dependent while you work.)
Grab bag
Those are only a few of the many breaks available to taxpayers. Here's a not-even-remotely comprehensive list of several more:
- You can deduct many medical expenses that exceed 7.5% of your AGI. If your AGI is $100,000, and you pay $10,000 in medical expenses, you're looking at a possible $2,500 in deductions. (Qualifying expenses include travel costs, rehab treatments, and more.)
- If you're self-employed, you can deduct all of your health-insurance premiums.
- If you spend money doing volunteer work (driving your car, buying supplies, etc.), you may be able to claim a deduction.
- If you travel to military reserve training, you may be able to deduct your expenses.
- If you incur educational expenses, you may be able to offset those with credits.
- If you're disabled, you may qualify for a higher standard deduction.
Tax rules are rarely simple. To maximize your tax breaks, you may want to consult a qualified tax pro, or just spend some time doing research on your own. Here are several great resources for you:
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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. The Motley Fool is Fools writing for Fools.
