The biggest mistake on your tax return might not be incorrectly entering your Social Security number or forgetting to sign the return -- two of the repeat top offenders the IRS sees. Rather, it may be not claiming enough deductions and credits. Two-thirds of taxpayers take the standard deduction, IRS statistics show. For tax year 2012, that’s $5,950 for singles and married people filing separately, $8,700 for heads of household and $11,900 for married couples filing jointly. It’s not spare change -- yet those who itemize tend to take far more. In 2009, the latest figures available, taxpayers who itemized deducted an average of $25,545. Bigger-ticket deductions include well-known ones such as mortgage interest and significant medical expenses, but there are a few valuable ones you might be missing.
The biggest mistake on your tax return might not be incorrectly entering your Social Security number or forgetting to sign the return -- two of the repeat top offenders the IRS sees. Rather, it may be not claiming enough deductions and credits.
Beth Davies, Personal Finance Writer
Odds are good that if you have kids, you know about the valuable credit for child care and dependent care expenses. Depending on their adjusted growth income, families can claim a credit worth 20 to 35 percent of up to $3,000 in expenses for one child, and up to $6,000 in expenses for two or more. What more families forget: Even if the kids are in school rather than day care, expenses such as day camps can qualify, says Melissa Labant, director of taxation for the American Institute for Certified Public Accountants.
Student Loan Interest
Don’t just tally up interest on loan payments you made in 2012. The IRS also allows a taxpayer to deduct up to $2,500 worth of interest on loans parents paid off on a student's behalf. To qualify, the loans must be in your name, and you can’t be claimed as a dependent on your parents’ taxes.
Investment Management Fees
Investment management fees are "often missed because people don’t realize they’re paying them,” says certified public accountant Tim Abbott, the accounting and tax manager at M.J. Vandenbroucke Inc. in Chicago. Such brokerage and investment advice fees often debit directly from the account rather than arriving as a separate bill. They’re only deductible if they and other “miscellaneous itemized deductions” amount to more than 2 percent of a taxpayer’s adjusted gross income. But that’s not a tough threshold, he notes, if you have a lot of professionally managed investments.
Uncle Sam may offset funds put in an IRA, 401(k) or other retirement plan. Savers can claim a credit worth as much as 50 percent of contributions, up to $1,000 total for single filers and $2,000 for couples filing jointly. The more you earn, the less you can claim: Individuals who earn more than $27,750 and married couples filing jointly who earn more than $55,500 don’t qualify. “It’s only been around for a few years, and that’s one reason why it’s overlooked,” says Labant.
Most people remember to comb their credit card statements, cancelled checks and shoebox of receipts for charitable donations of cash, which are deductible up to 50 percent of your adjusted gross income. “Nobody ever remembers to look at their paycheck,” says Labant. But if you donated to charity through your employer, that December pay stub might be the only place those valuable contributions are reflected.
Workers can deduct the costs of a move provided that they are moving for a new job that is at least 50 miles from their former home. They must also work full-time for at least 39 weeks of the next 12 months after moving.
Unreimbursed job expenses can add up, and may be deductible if they and other “miscellaneous itemized deductions” amount to more than 2 percent of a taxpayer’s adjusted gross income. “A lot of times when people start to think about it they realize, my job puts me out of pocket several hundred dollars a year,” says Abbott. That may include a cellphone plan for salespeople, school supplies teachers pay for on their own or a uniform for retail workers.
Congress recently renewed the sales tax deduction for 2012 for a period of two years. The deduction is a valuable one -- consumers who itemize can choose to deduct state income tax paid, or state sales tax paid over the tax year. In states where there is low or no income tax, and for people who made big purchases over the tax year, it can be the more valuable choice, says Labant. No need to save every receipt, either. The IRS has a calculator to help figure out typical spending.
Tax Prep Fees
If you itemize, tax preparation costs paid that tax year are deductible. Most people claim their accountant’s fees or costs to purchase software, says Abbott, but estate planning that includes some tax element, like a will or living trust, may be eligible, too. “Easily half of that would be tax-related,” he says.
“If you have someone in school, consider all the different types of education incentives to find out which matches your needs,” Labant says. Here, credits, which reduce the tax bill dollar for dollar, may be preferable to deductions, which reduce a person’s taxable income. Many people miss out on the $2,500 American Opportunity Tax Credit because they claim the $4,000 tuition and fees deduction instead. “In reality," she says, "the credit provided the bigger tax savings."