Updated on 02.19.15

Don’t Forget to Deduct…

Here are some often overlooked tax deductions and credits you don't want to miss.

Uhaul truck on dirt road

You can deduct moving expenses if you relocate more than 50 miles for your first job. Photo: Kai Schreiber

The tax-preparation chain H&R Block is running a commercial this year that invites Americans to “get their billions back.” But what exactly does it mean?

The overwhelming majority (84%) of Americans who e-filed a tax return last year received a refund, according to the IRS. The average amount of those refunds was $3,211, for a grand total of just over $100 billion. What’s more, a study estimates 20% of taxpayers left an average of $450 in the government’s hands through unused deductions — for a total of $3.345 billion in unclaimed refunds.

Don’t Miss These Tax Deductions

The key to getting your maximum refund is to not leave any legitimate deductions behind. To help you get the biggest refund you have legally coming to you, we’ve compiled a list of commonly overlooked deductions to help you out.

State Sales Tax

Borrowing a line from Mark Twain, the rumors of this deduction’s demise are greatly exaggerated. Sure, it expires regularly, but it has been brought back from the grave more times than Dracula. While it has not been reinstated for purchases in 2015, it does apply to taxes paid in 2014.

The IRS allows filers to deduct either their state income tax paid or sales tax paid. For example, if you live in my home state of Pennsylvania and you paid more than 3.07% of your taxable income in sales tax, you’re better off deducting that than deducting your state income tax. You can determine which is best for you with a pocket calculator, or you can use the IRS’s sales tax deduction calculator to see which deduction makes the most sense for you to claim.

Charitable Contributions

Generosity pays! Contributions to charity are fully deductible, which means that for every dollar you donate, your taxable income is reduced by $1. That means if you are in the 25% tax bracket, a $100 contribution can lower your tax bill by about $25. Cash donations, which include checks, credit cards, and payroll deductions greater than $250 require a receipt. Only donations to “qualified charitable organizations” are deductible.

If you receive anything in exchange for your contribution, you must deduct its fair market value from the amount of your contribution. For example, if you buy a photograph worth $25 at a charity auction for $100, you can deduct a contribution of $75.

Out-of-Pocket Charitable Deductions

In addition to cash contributions, you can also write off out-of-pocket expenses you incur while doing charitable work. For example, if you build birdhouses for a charity to sell, you can deduct the cost of your materials — but not your time. Any mileage you incur while performing charitable work can be deducted at the rate of 14 cents per mile plus the cost of parking and tolls that you paid.

Student Loan Interest

College is expensive, and getting more so every year, which is why so many students and their parents have turned to loans to pay for college. While there is no sign the student debt crisis is getting any better, there is at least one bright spot — the student loan interest deduction.

A deduction of up to $2,500 per year is possible on qualified student loans. In order to take advantage of the deduction, the loan must be in your name and you cannot be a dependent on your parents’ return. You can also take the deduction if your parents are helping you pay back the loan, since their payments are considered gifts.

Parents who have taken out loans such as the parent PLUS loans on behalf of their children may deduct interest paid on loans that are in their name.

Other Loans for Education

Loans that are not part of a student loan program — such as home equity or credit card loans — that are taken out to pay for education, can be treated as a qualified student loan if they meet the following criteria:

  • Loans must have been used to exclusively pay for education. Loans that are even partially used for other purposes are not deductible.
  • Expenses must be for a specific academic period.

The bottom line on student loan interest is that the deduction goes to the person whose name the loan is in.

Job-Hunting Expenses

Being out of work can be one of the most stressful things in life, especially when you factor in the cost of looking for a job. The best news you can hear when searching for a job is “you’re hired,” and the second best news may be that the cost of looking is deductible.

Job-hunting costs are tax deductible if they were incurred while you were looking for employment in the same line of work as your most recent job. Deductible expenses include:

  • Transportation, including 56 cents a mile for driving your own car, plus parking and tolls.
  • Food and lodging if your job search takes you out of town overnight.
  • Employment agency fees.
  • Postage, advertising, and printing of resumes.

The caveat to this deduction is that your qualifying expenses must be more than 2% of your adjusted gross income. This deduction does not apply to costs related to finding your first job.

Moving Expenses for Your First Job

If you’re fresh out of college (or entering the workforce for the first time for any reason) and move more than 50 miles to take a job, your moving expenses are deductible. As a bonus, unlike many other deductions, this one does not require that you itemize to take advantage of it.

You can deduct reasonable expenses, including 23.5 cents per mile plus tolls and parking if you moved using your own car.

Military Reserve Travel Expense

This deduction is available to members of the National Guard or any of the service reserves. The deduction allows you to write off the cost of travel to and from training, meetings, and drills.

To qualify, the travel must be more than 100 miles each way and require an overnight stay. You are allowed to deduct the full cost of lodging and 50% of your meals. If you use your own car to travel to and from your guard or reserve duty, you can deduct 56 cents per mile plus tolls and parking.

Mortgage Points

Points are charges added to home mortgages, usually equal to 1% of the amount financed. Since they’re essentially prepaid interest on the loan, they’re considered tax deductible.

When you first purchase a home, the full amount of your mortgage points are deductible on that year’s tax return. If you refinance your home, the points must be deducted over the course of the life of the loan.

For example, if you refinance your home with a 15-year mortgage, you can deduct 1/15th of the cost of points paid in each of the next 15 years. In the event you sell your home or pay it off early, you can deduct all remaining undeducted points in that year. These deductions apply to your primary residence.

Jury Duty Pay That Goes to Your Employer

If you’re among the fortunate individuals whose employer continues to pay your full salary while you are on jury duty, but requires that you sign over your jury duty check in exchange, you can deduct the amount you give your employer.

Money Spent to Get Alimony

As a rule, attorney fees and court costs are not tax deductible. However, a notable exception is the costs associated with securing alimony. The reason for this exception is that alimony is taxable as income.

You are only allowed to deduct the portion of attorney fees and court costs that is associated with alimony, and not the entire cost of related actions, such as divorce or child support claims. The amount you can deduct cannot exceed 2% of your adjusted gross income.

Tax Credits

Unlike a deduction, which reduces your taxable income and therefore your tax bill, credits reduce your tax bill on a dollar-for-dollar basis.

There are two types of credit: refundable and nonrefundable. Nonrefundable credits are the most common type and can be used to reduce your tax to zero. Refundable credits, which are less common, are paid (refunded) even if your tax liability is less than zero.

Child Care Credit

This credit is available to taxpayers who pay for child care for a qualifying dependent child so that they can work. Eligible children must be under 13 when the care is provided or physically or mentally incapable of caring for themselves.

To qualify, married couples must both be employed. In the case of divorced, separated, or otherwise single parents, the child must have lived with you for more than six months of the year, and you must be claiming the child as a dependent on your return.

The credit is up to $3,000 for one child and $6,000 for two or more children. You must report the name, address, and taxpayer ID or Social Security number of the provider on your return.

Additional Child Care Credit

Because the child care credit is refundable, it can only reduce your tax to zero. If you have exhausted the child care credit and still have qualifying expenses, you may be eligible to receive the additional child care credit, which is refundable. You are limited to the unused portion of the child care credit or 15% of your earned income in excess of $3,000, whichever is greater.

Income phase-out: Both the child care credit and the additional child care credit are subject to income phase-outs based on your modified adjusted gross income. For married couples filing jointly, the phase-out begins at $110,000. For married couples filing separately, the phase-out is $55,000, and those filing as single head of household are subject to a $75,000 income limit. The credit is reduced by $50 for each $1,000 you earn over the threshold.

American Opportunity Credit

This education credit is available to parents and students to help pay for the cost of college. It’s good for all four years of college, unlike the Hope Credit, which it replaced. This is a refundable credit, which means it will generate a refund even if your tax is reduced to zero.

The credit has a maximum payout of $2,500 per student, and a significant advantage of this credit is that the qualifying incomes are higher than for other education credits. Eligible taxpayers must have a modified adjusted gross income of less than $160,000 (joint filers) or $80,000 (single filers). The credit is phased out for taxpayers whose income exceeds those limits.

Lifetime Learning Credit

This credit is expressly for adults who are returning to college to complete their education. The credit can be used to pay for undergraduate, graduate, and professional degrees as well as courses to acquire or improve job skills.

The maximum credit is $2,000 per return, which means married couples who file a joint return can only apply for the credit for one spouse. The full amount of the credit is available to married couples with a modified adjusted gross income of less than $104,000 and single filers who earn less than $52,000.

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