1. State sales taxes. Although all taxpayers have a shot at this write-off, it makes sense primarily for those who live in states that do not impose an income tax. You must choose between deducting state and local income taxes or state and local sales taxes. For most citizens of income-tax states, the income-tax deduction is a better deal.
IRS has tables that show how much residents of various states can deduct. But the tables aren't the last word. If you purchased a vehicle, boat or airplane, 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. These items are easy to overlook, and these add-ons could make the sales-tax deduction a better deal even if you live in a state with an income tax. The IRS even has a calculator on its Web site to help you figure the deduction, which varies depending on the state where you live and your income level.
2. Reinvested dividends. This isn't really a deduction, but it is a subtraction that can save you a bundle. And, this is the break former IRS Commissioner Fred Goldberg told Kiplinger's that lots of taxpayers miss.
If, like most investors you have mutual fund dividends automatically invested in extra shares, remember that each reinvestment increases your "tax basis" in the fund. That, in turn, reduces the taxable capital gain (or increases the tax-saving loss) when you redeem shares. Forgetting to include the reinvested dividends in your basis -- which you subtract from the proceeds of sale to pinpoint your gain-means overpaying your tax.
3. Out-of-pocket charitable contributions. It's hard to overlook the big charitable gifts made during the year, by check or payroll deduction (check your December pay stub). But the little things add up, too, and you can write off out-of-pocket costs incurred while doing good works.
Ingredients for casseroles you prepare for a church or nonprofit organization's soup kitchen, for example, or the cost of stamps you buy for your school's fundraiser count as a charitable contribution. If you drove your car for charity in 2008, remember to deduct 14 cents per mile (or 35 cents a mile during the first half of the year and 41 cents per mile for driving during the last six months to aid victims of the floods and tornadoes in the Midwest).
4. Student loan interest paid by mom and dad. Generally, you can only deduct mortgage or student loan interest if you are legally required to repay the debt. But if the parents pay back a child's student loans, IRS treats it as though the money was given to the child, who then paid the debt. So, a child who's not claimed as a dependent can qualify to deduct up to $2,500 of student loan interest paid by mom and dad. And he or she doesn't have to itemize to use this money-saver.
5. Moving expense to take your first job. Here's an interesting dichotomy: Job-hunting expenses incurred while looking for your first job are not deductible; but moving expenses to get to that first job are. And you get this write-off even if you don't itemize. If you moved more than 50 miles, you can deduct the cost of getting yourself and your household goods to the new area, including 19 cents per mile for moves during the first six months of 2008 and 27 cents per mile for driving your own vehicle after June 30, plus parking fees and tolls.
6. Military reservists travel expenses. Members of the National Guard or military reserve may deserve a deduction for travel expenses to drills or meetings. To qualify, you must travel more than 100 miles from home and be away from home overnight. If you qualify, you can deduct the cost of lodging and half the cost of your meals, plus 50.5 cents per mile for driving your own car during the first six months of the year and 58.5 cents per mile for driving after June 30. In any event, add parking fees or tolls. You get this deduction regardless of whether you itemize.
7. Child-care credit. A credit is so much better than a deduction: It reduces your tax bill dollar for dollar. So missing one is even more painful than missing a deduction that simply reduces the amount of income that's subject to tax.
It's easy to overlook the child-care credit if you pay your child-care bills through a reimbursement account at work. While only $5,000 of such expenses can be paid through a tax-favored reimbursement account, up to $6,000 (for the care of two or more children) can qualify for the credit. So, if you run the maximum through a plan at work, but spend even more for work-related child care, you can claim the credit on an extra $1,000. That would cut your tax bill by at least $200.
8. Estate tax on income in respect of a decedent. This sounds complicated, but it can save you a lot of money if you inherited an IRA from someone whose estate was subject to the federal estate tax.
Basically, you get an income-tax deduction for the amount of estate tax paid on the IRA balance. Let's say you inherited a $100,000 IRA, and the fact that the money was included in your benefactor's estate added $45,000 to the estate tax bill. You get to deduct that $45,000 on your tax returns as you withdraw the money from the IRA. If you withdraw $50,000 in one year, for example, you get to claim a $22,500 itemized deduction on Schedule A. That would save you $6,300 in the 28% bracket.
9. State tax paid last spring. Did you owe tax when you filed your 2007 state tax return in the spring of 2008? Then, for goodness sakes, remember to include that amount with your state-tax deduction on your 2008 return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments.
10. Refinancing points. When you buy a house, you get to deduct points paid to get your mortgage in one fell swoop. When you refinance a mortgage, though, you have to deduct the points over the life of the loan. That means you can deduct 1/30th of the points a year if it's a 30 year mortgage -- that's $33 a year for each $1,000 of points you paid. Not much, maybe, but don't throw it away.
Even more important, in the year you pay off the loan -- because you sell the house or refinance again -- you get to deduct all as-yet-undeducted points. There's one exception to this sweet rule: If you refinance a refinanced loan with the same lender, you add the points paid on the latest deal to the leftovers from the previous refinancing ... and deduct the expense gradually over the life of the new loan.11. Jury pay paid to employer. Many employers continue to pay an employees' full salary while they serving on jury duty, and some require the employees to turn over their jury fees to the company coffers. The only problem is that the IRS demands that you report those fees as taxable income. To even things out, you get to deduct the amount paid to your employer.
But how do you do it? There's no line on the Form 1040 labeled "jury fees." Instead the write-off goes on line 36, which purports to be for simply totaling up the deductions that get their own lines. Add your jury fees to the total of your other write offs and write "jury pay" on the dotted line.
Four new threats to your bottom line
These four new tax breaks are sure to be missed by far too many taxpayers. Be sure you're not among the overtaxed victims.
12. Recovery rebate credit. Remember those glorious tax rebates we got last year -- $600 for singles, $1,200 for married couples, plus $300 for each qualifying child? Well, they were really a pre-payment of the recovery rebate credit that appears on 2008 tax forms. Most Americans got everything they deserved last year, so they won't get a dime from the credit.
But millions of American do qualify for the credit, and it will save the lucky ones hundreds of millions of dollars. Who might qualify? You might, if your financial situation was different in 2008 from 2007. The rebate was based on information on 2007 tax returns, you see; the credit is based on what's on your 2008 return.
If you had a baby or adopted a child in 2008, so you probably deserve $300 in the credit. Divorced parents who alternate claiming the kids as dependents can both earn $300 for the children. The parent who claimed the children on his or her 2007 return got the rebate; the parent who claims them on the 2008 return gets the credit. It's perfectly legal. An adult child who was claimed on his or her parents return in 2007 couldn't get a rebate. But if he or she isn't a dependent this year, a $600 credit may be in order.
Both the rebate and the credit phase out at higher income levels -- more than $75,000 on single returns or more than $150,000 on joint returns. So, if your 2007 income was too high to earn the full rebate, but your 2008 income is lower, you may deserve a credit now. There's a 29-line worksheet in the IRS instructions, and by late February, the IRS expects to have a special calculator at www.irs.gov.
13. Double Hope and Lifetime Learning credits. After last summer's floods in the Midwest, Congress approved many breaks to assist the victims. Most benefit only people who live in the affected areas. But one big break -- a doubling of the value of the Hope and Lifetime Learning college credits -- applies to parents anywhere whose children go to college in designated parts of seven states: Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska and Wisconsin.
If your son goes to school in Iowa City or Madison, Wisc., for example, your Hope credit for the first two years of college jumps to $3,600 per qualifying student, for example, while the lifetime learning credit for other higher education doubles from $2,000 to $4,000 per return. The credits phase out at higher income levels, but qualifying parents in the phase-out zone still get bigger credits thanks to this change.
14. Property tax deduction for non-itemizers. Normally, to write off property taxes, you must itemize deductions. But for 2008, even homeowners who claim the standard deduction -- as about two-thirds of all taxpayers do -- can use property taxes to trim their income tax bill. You can boost your standard deduction amount by $500 if you're single or $1,000 if you're married and file a joint return to account for property taxes you paid on your home during 2008.
15. Casualty loss deduction for non-itemizers. Normally, only taxpayers who itemize deductions can deduct casualty losses. But for 2008, taxpayers who claim the standard deduction -- again, that's most taxpayers -- can add their casualty losses to their standard deduction amounts ... if their loss occurred in a presidentially designated disaster area. Also, the casualty loss deduction for losses in presidentially declared disaster areas does not have to be reduced by an amount equal to 10% of your adjusted gross income.
By Kevin McCormally,