“People who complain about paying their income tax can be divided into two types: men and women.”
‘Tis the time of year when some Americans await refunds, while others groan, procrastinate, and start getting their receipts in order… tax time!
Unless you were one of the early birds who pounced eagerly on their W-2 or 1099’s, you may still have an opportunity to find deductions and maximize the tax savings on your 2016 earnings. We detail the deductions you won’t want to overlook, plus we name five “deductions” you CAN’T take after all!
Tax Deductions You Shouldn’t Overlook:
Itemizing deductions in the first place. If you’re not itemizing, you could be short changing yourself. According to TurboTax.Intuit.com, 45 million Americans itemized deductions on their 1040s, claiming $1.2 TRILLION in tax deductions! In contrast, taxpayers claiming the standard deduction accounted for $747 billion in deductions.
State and local sales tax. Since you must choose between deducting state and local income taxes, or state and local sales taxes, this write-off generally makes the most sense for those who live in states that don’t impose an income tax.
If you bought a vehicle, boat or plane or are building a home, the sales tax deduction can come in especially handy. According to TurboTax, you get to add the state sales tax you paid to the amount shown in IRS tables for your state, to the extent the sales tax rate you paid doesn’t exceed the state’s general sales tax rate. The same goes for home building materials you purchased.
And don’t forget the taxes you paid last spring. If you owed taxes when you filed your state tax return the previous spring, TurboTax’s website advises, “remember to include that amount with your state tax itemized deduction on your (current) return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments.”
Mileage deductions. You cannot deduct the miles you drive to and from a job. However, you can deduct miles driven in support of your business such as:
- Visits to customers, clients or patients
- Errands such as mailing a business package or shopping for supplies
- Business meals and entertainment, and
- Business-related travel, including traveling to and from the airport on a business trip.
Even if you are an employee, you can still take certain mileage deductions, including:
- Travel between two business offices
- Commuting between jobs, when you don’t go home between
- Job searching when looking in the same field you last worked, and
- Driving to a temporary work location (less than one year) outside of your metropolitan area.
Ideally, you already track your mileage through a journal or an app such as MileIQ. Even if you did not keep records, if you know where you traveled and when you can use google maps or other apps and websites to track and substantiate your mileage.
At 54 cents per mile in 2016, for every 1,000 business miles driven, you can subtract $540 from your taxable earnings, which makes it well worth the little time it takes to track mileage.
Charitable contributions. Be sure the organization qualifies for tax-deductible donations. 501(c)3 organizations qualify, but most other types of organizations don’t. (You’ll see two exceptions in our final section.)
You can claim cash donations or you the value of other assets such as a vehicle, boat, appreciated stock or other donated asset. If you did not receive an end-of-year statement from any church or organization you donated to, reach out to them to update your records. Or instead of a statement (not all organizations offer them), you can use receipts or cancelled checks.
“Goodwill” non-cash donations such as the clothes and household goods. Did you donate no-longer-needed clothing or items to Goodwill or other charities? If the charity is a 501(c)3, the donation would be tax deductible.
To ensure you receive and maximize your tax deduction, document value of non-cash gifts. The “It’s Deductible” app makes it easy to establish the value of used clothing and other common items you donated. Can’t find your receipt? Contact the charity, you can probably obtain another.
- Make sure the charity is a 501(c)3.Not all good causes are non-profits, and not all non-profit organizations meet the criteria for tax-deductible donations.
- Save your receipts.You can file them, put them in a box, scan them, or send them to a bookkeeper who will handle it for you.
- Donate appreciated assets.If a stock has risen in value, you can donate the stock rather than sell it and pay capital gains. The charity won’t have to pay the capital gains, and you can then reinvest with money from another source, making the move a win-win.
Childcare and elderly care expenses. If you paid someone to care for a child, age 12 or younger, or any other dependent who cannot care for themselves, provided they lived with you for more than 1/2 the year, including a parent or a disabled spouse, you are eligible for a tax credit.
The child and dependent care credit can be used regardless of income, although the benefit is larger for those who earn less. Some employers may allow you to pay for dependent care with after-tax dollars, which may be even more beneficial.
Qualifying tuition and education expenses. There are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. They are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).
You may be able to claim a credit of up to $2,500 for adjusted qualified education expenses paid for each student who qualifies for the AOTC, and up to $2,000 for the LLC. And these aren’t just for dependents; even if you only took one course, you may still qualify for a tax credit. See this IRS webpage for more information about both of these tax credits.
Costs related to a job search. Are you in transition? Whether or not you secure a new job, you can deduct costs related to your job search such as preparing and sending resumes, placement agency fees and even travel for job interviews. You cannot deduct job search expenses for your first job.
Costs of a job-related move. If you secure a job in a new market location, you can deduct the expense of relocating if you must move to accept the new position. You must work at least 39 full-time weeks in the year following your move, and the new job location must be at least 50 miles further than the distance from your home to your old job location.
Reinvested Dividends. This isn’t really a tax deduction, rather, it’s an often-overlooked subtraction that could have meant a substantial tax savings.
If you have mutual fund investments and if you automatically invest your dividends in extra shares, each reinvestment increases your “tax basis” in the fund. In turn, the increased tax basis reduces the amount of taxable capital gains when you sell your shares.
Forgetting to include the reinvested dividends in your cost basis—which you subtract from the proceeds of a sale to determine your gain—means overpaying your taxes.
If you don’t use an accountant to prepare your taxes, consider preparing your taxes using TurboTax Premier or Home & Business. They both include a cool tool—Cost Basis Lookup—that will figure your basis for you and make sure you get credit for all of your reinvested dividends.
5 “Deductions” You Can’t Claim:
Not all good causes that accept donations qualify for tax-exempt status. The following donations may be making, but you won’t be able to claim them on your tax return:
1. Raffle tickets or other lottery-based drawings. Even if it might be sponsored by a qualifying non-profit, it’s not considered a “gift” if you enter a contest with prizes. Fund-raising raffles are a great way for an organization to raise money, but the tickets aren’t tax deductible.
2. Good causes that aren’t registered as legal non-profits. Donations to great majority of GoFundMe campaigns and other crowd-funding websites are considered to be personal gifts and not donations you can claim on your taxes. However, if a registered non-profit creates a GoFundMe or similar campaign, the donations may be tax deductible.
Some 501(c)(4) organizations qualify, others don’t. Social welfare and civic organizations registered under section 501(c)(4) don’t qualify. But two types of 501(c)(4) organizations DO qualify: veterans’ organizations with 90 percent war vet membership, and volunteer fire departments.
3. Political contributions. Giving to those who support your political convictions is a good and patriotic thing to do, but it won’t help you at tax time! You cannot claim the following as tax deductions:
- Money given to political parties, candidates or committees working on their behalf
- Political advertising promoting a candidate or political party
- Campaign fund-raising events such as dinners and luncheons.
4. Future donations. A donation pledge or a post-dated check that a non-profit will cash in the future doesn’t constitute a tax-deductible gift.
5. Gifts from which you receive value in return. When you make a donation and receive wrapping paper, a magazine subscription or a charity dinner in return, you can only deduct the difference between what you paid and the donation you made. If you paid $100 to attend the charity banquet and you would have paid $35 for the meal in a restaurant, you can deduct $65 from your taxable income.
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