It’s a scary thought, but the IRS Code is over 74,000 pages long! So is it any wonder that people miss out on lucrative tax deductions? Definitely not.
So what are some tax deductions to consider? Well, there are plenty. But before taking a look, it’s important to first get some background on how tax deductions work.
Basically, a tax deduction reduces your income, which means you will pay a lower tax. Example: Suppose you made $70,000 and you get $5,000 in deductions, which means you will pay taxes on $65,000. And yes, the tax is based on your tax bracket. So if you’re in the 25% bracket, then you will save $1,250 on the tax deductions (here’s a calculator that provides an estimate of your tax bracket).
Not bad, right? Absolutely. But it is important to keep in mind that there are different kinds of deductions. One is the exemption, which provides a $4,000 deduction for you, your spouse and dependents. Then there is the standard deduction. This is a fixed amount you put on your tax return, which is based on factors like your filing status, age, and so on.
If you have deductions that exceed this amount, you can elect to itemize your deductions instead, which requires using Schedule A. This is usually for those people who have mortgages or high medical costs.
Here’s a look at six of the most commonly overlooked tax deductions.
Overlooked Tax Deductions: Casualty losses
A casualty loss is for when your property is damaged, destroyed or even stolen. You report this on both forms 4684 and Schedule A.
To qualify for a casualty loss, the event must be sudden and unusual. Examples include auto accidents, earthquakes, fires, floods, storms and hurricanes. But if the damage is willful, such as because of arson, or is a progressive deterioration (say a termite infestation), then there is no deduction allowed.
Of course, there are some other important restrictions on the deduction. First, you must subtract $100 for each loss and then the deduction allowed is the amount in excess of 10% of your AGI (adjusted gross income). Also, you need to exclude any money from insurance or litigation payouts).
In terms of timing, you deduct the casualty for the year when it occurred. Yet there is an exception: If the loss is in a federally declared disaster area, then you can deduct it in the prior year — using an amended return — which means you will get your tax benefit sooner. There is also no requirement to itemize your deductions.
Overlooked Tax Deductions: Points
Your home is a gold mine of tax breaks. But there is one that is easy to overlook: points. This is a fee in which each point is equal to 1% of the loan amount.
When you get a mortgage, you should be able to deduct all the points during the year of the purchase of the home. But there are some important rules. For example, the money must be used to buy or build a main home, the loan has to be secured by the property, and the payment of points must be an established practice in your community.
For more details regarding points as well as other deductions for home onwership, you can check out my recent post on homeowner tax deductions.
Overlooked Tax Deductions: Margin Interest
A margin account is for when you borrow money in your brokerage account. Interestingly enough, there may be the potential to get tax deductions so long as you itemize (you put the amount on line 14 on Schedule A and you might have to fill out Form 4952).
But there are some important requirements. First of all, you can only deduct interest for the money that you use to purchase investment property, something that produces interest, dividends, annuities or royalties as well as capital gains and losses. So this means you can deduct the money you use to purchase your stocks, bonds, ETFs and mutual funds. However, this doesn’t include tax-free investments like municipal bonds.
Next, the deduction is limited to the net investment income generated for the year (this is the gross income and gains from your investments minus expenses like safe deposit fee, investment advisory fees and so on). But if there is an excess amount, you can carry it forward to future tax years.
Overlooked Tax Deductions: Gambling Losses
Like the occasional trip to Las Vegas to play the slots or try your luck at the roulette table? The good news is that the IRS can help out!
You see, you can deduct the losses up to the amount of your winnings (however, you cannot carry forward any excess losses to future years). This can also be for any type of gambling, including lotteries, raffles and sports bets. Although, this is a tax deduction that requires that you use Schedule A (you report your winnings on line 21 and the losses on line 28).
But as should be no surprise, the IRS likes to audit gambling losses. So to protect yourself, you should keep a log of your winnings and losses. Items to track include the dates of your gambling as well as the kinds of activities, the locations you visited, the people you gambled with, and the amounts won and lost. You should also keep records like receipts, wagering tickets, credit card and statements.
Overlooked Tax Deductions: Tax Preparation Fees
If you pay a tax preparer, you can deduct the fee. But you can also include what you pay for an online service, such as from H&R Block (HRB) or Intuit’s (INTU) TurboTax. In fact, you can also deduct the fees for any advice from a tax pro who helped with a complicated matter or represented your interests before the IRS (say for an audit).
However, the deduction is considered miscellaneous, which means it must be itemized (on line 22 of Schedule A) and subject to the 2% limit (that is, the amount in excess of 2% of your AGI). What’s more, you can only deduct the fee for the year when it was paid.
Overlooked Tax Deductions: Jury Duty
The amount a court pays for jury duty is taxable income. However, in some cases, an employer will require you to hand over the payment. The reason is that your salary will not be adjusted for your absence.
So to avoid essentially paying income taxes on the jury duty, you can make an adjustment on your 1040, which is on Line 36. In other words, you get this deduction regardless of whether you itemize your deductions or not.
Tom Taulli is an Enrolled Agent (the highest designation for the IRS) and the founder of BizDeductor, which offers services and apps to help save a bundle on taxes. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
