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20 Frequently Overlooked Tax Savings
Certain deductions, credits and tax "elections" are frequently overlooked, costing you many dollars in extra taxes. Here are 20 common ones. (A tax election is a choice you make on your return that affects the amount of taxes you will have to pay. Your choice of filing status is one example.)
That's 20. Look over the blank lines on your return. Could any of these apply to you? Check them out. Don't count yourself out before you're sure you're out.
- Single parents may file as head of household. If you are single at the end of the year and had a dependent child (or other dependent) living with you for at least half the year, you may qualify for lower tax rates by claiming "head of household" as your filing status rather than "single."
- Widowed spouses may still enjoy married-filing-jointly rates. Widowed spouses may still enjoy married-filing-jointly rates. If your spouse died in the last two years and you have a dependent child living with you, you may file as a "surviving spouse" for 2001 and be taxed at "married-filing-jointly" rates. These rates are even more favorable than the head-of-household rates (which you may graduate to in the third tax year after your spouse dies). If your spouse died in 2001, you still may file as married.
- Claim parents as dependents. If you furnish more than half of the support of your parents, you may be entitled to claim them as dependents on your return. (If you furnish less than one-half, but the combined support given by you and your siblings exceeds one-half, you may be able to arrange to designate one of you as eligible to claim the deduction.)
- Additional standard deduction if you are blind or 65 or older. If you are unable to itemize and you are blind or 65 years of age or older, you are entitled to take additional dedutions beyond the normal standard deduction for your filing status.
- Most of your Social Security benefits may be tax-free. Social Security is tax-free unless you have other income that puts you into the mid- to higher-income brackets. Then a portion of it may be taxed. So, be sure to treat your Social Security benefits as separate from other income.
- Earned income credit. This credit is available if your "earned" income is low. Investment income, Social Security and other income does not count.
- Contributions to IRAs. You may be entitled to deduct contributions to an individual retirement account (IRA). And you may still do this up to April 15. (If you are part of an employer-sponsored retirement plan and your income exceeds certain limits you may not get this deduction.) Recent rule changes make IRAs more flexible than ever.
- Collect overpaid Social Security tax if you worked for more than one employer. If you worked for more than one employer, each took Social Security taxes out of your paycheck based on what they paid you. You may claim a refund of the excess on your return.
- Education. Send your children to school and get a tax credit under new rules adopted in the recent tax reform legislation. If you took courses to improve your skills in your line of work you may be able to deduct them. Education to go into a new line of work is not deductible.
- Home business expenses. If you run a business in your home, you may be entitled to deduct the cost of your office and equipment. Special rules apply to prevent you from deducting personal expenses, but you shouldn't forego legitimate deductions because of this.
- Health insurance for self-employed. Employees can receive health insurance from their employers tax-free, so self-employees may deduct 60 percent (in 2000 and 2001) of their health insurance premiums "above the line." This means that you get the deduction even if you can't itemize.
- Half of self-employment taxes are deductible. Another attempt to put the self-employed on an equal footing with employees is the deduction for half of your self-employment tax (Social Security tax). You pay the self-employment tax, but deduct half of the amount from your income.
- Disasters and other casualties or theft. If you have one of these losses, be sure to claim a deduction. If the president declares it a disaster area, you can get the money back fast by amending last year's return now rather than waiting for this year's return.
- Don't report state tax refund as income if you took standard deduction. State taxes are deductible, but if you get a refund you usually have to report state tax refunds as income. This rule does not apply if you didn't get a "tax benefit" from the taxes that were refunded to you. This means that if you took the standard deduction in the year you would have deducted the state taxes, you don't have to report it when you get the refund.
- Don't overlook medical expenses. Of course you may deduct insurance premiums, doctors' fees and hospital expenses, as long as they were not covered by insurance. But did you know that you may deduct for items that are not normally covered by health insurance, such as glasses and transportation and lodging related to out-of-town medical procedures?
- Don't pay the nanny tax if you don't have to. If you have a household employee whom you paid more than $1,000, you are required to pay his or her Social Security tax (Schedule H of your 1040). This has been in the news a lot in recent years and the law was changed to establish the $1,000 mark as a "reasonable" place to start collecting this tax. With the new limits, the IRS is in a position to actually enforce the law. But don't pay this if you don't have to. If you are paying someone who is under the age of 18, it's not required. And it's not required if you are going through an agency and the worker is technically employed by the agency.
- Mutual funds. Mutual funds make different kinds of distributions during the year (which they report to you at year's end). Don't make the mistake of treating capital gains distributions the same as dividend payments. Capital gains distributions may not be taxed at more than the capital gains tax rate.
- Take advantage of lost deductions from other years. If you lost out on some deductions last year because your taxable income was not sufficient to absorb them all (or other technical reasons), you may be able to use them this year. Don't overlook the possibility. Business losses, investment losses and charitable contributions are all items that may be "carried over" to later years if they are not fully used for the year they occur.
- You can deduct investment fees. Check to see if you can deduct fees for financial planning, investment advice, subscriptions to investment publications, custodians, safe deposit boxes and other items related to your investments. You need to exceed 2 percent of your adjusted gross income (together with job-related expenses and other miscellaneous deductions) to qualify for this deduction. But the more you find, the more likely it will be that you will be able to deduct. These go on Schedule A.
- Remember to deduct return preparation fees. Finally, whatever you paid to have your tax return prepared last year also is deductible. This belongs in the same category as item 19, but I thought I'd mention it separately so that you will feel a little better when you dish it out again this year.