5 Commonly Overlooked Tax Deductions
Every year, Americans make all sorts of mistakes on their taxes, costing them hundreds, if not thousands, of dollars. And while basic arithmetic errors perpetually top the list (!), here are five of the more valuable money-saving credits and deductions that are often overlooked:
Earned income tax credit (EITC)
The IRS estimates that nearly 6 million taxpayers who are eligible for the Earned Income Tax Credit (EITC) fail to claim it. That’s one in five! And the reason we’re not claiming this credit — a credit designed to supplement wages for low-to-moderate income workers (which is a lot of people these days, including many individuals and families who were previously classified as “middle class”) – is generally due to one of two reasons: a) the rules pertaining to this credit are confusing, and b) taxpayers are not aware that they qualify! What’s it worth? The maximum credit for 2010 is $5,666 for those with three or more dependent children; smaller credit amounts are available for those with fewer – or no – qualifying children. While the exact refund you receive depends on your income, marital status, and family size, consider this: qualifying taxpayers who claimed the EITC last year got an extra $2,200 on average.
With 15 million Americans out of work, you might very well be one of them. But if you looked for a position in the same line of work in 2010, and if you itemize your return (!), you can deduct job-hunting costs — from cab fares to food, travel and transportation expenses to/from interviews, to business cards, career counseling, the costs of preparing and copying your resume and more — as miscellaneous expenses. A few caveats: expenses incurred by those seeking first-time employment are not deductible (Sorry, recent grads!), and in order to get this break, the amount of all miscellaneous itemized tax deductions must exceed 2% of your adjusted gross income. That may sound like a lot, but you’d be surprised how easy it is to clear this threshold–particularly if you didn’t make much last year. Furthermore, you get this break even if the job search was unsuccessful.
Out of pocket charitable contributions
While you surely remember any big charitable cash donations you made in 2010, you may easily forget the smaller, non-cash contributions. No, you can’t deduct your time, but you can deduct various out of pocket costs you incurred while doing good deeds–things like ingredients for pies you made for your favorite charity, materials you used to make blankets for a homeless shelter, stamps you bought for a fundraising event, and miles. You can claim 14 cents a mile for any driving you do in service of a charity or volunteer project.
When you have the option of claiming either state and local income taxes OR state and local sales taxes, the income tax deduction is typically a better deal. However, this write-off makes the most sense for those who in states that do not impose an income tax. How much can you deduct? Use the IRS’ tables as a guideline or prepare your taxes with software, it will do all the hard work for you!
Child-care tax credit
The child-care tax credit is easy to miss, particularly if you working parents pay your child-care bills (such as daycare or nanny services) through a tax-favored reimbursement account at work. While only $5,000 in expenses can be paid through one of these accounts, up to $6,000 (for the care of two or more children, under the age of 13) can qualify for the credit. What if you hit the cap at work and spend another $300? $500? $700? So long as these expenses are for work-related child care, up to an $1000 of additional costs can be claimed. How much it this credit worth? While that depends on your income, the number of children, and the cost of care, the credit starts at 35% of qualifying expenses if your adjusted gross income is less than $15,000 and phases out to 20% of eligible expenses if your adjusted gross income is more than $43,000.