Thursday, March 19, 2015

The 10 Most Overlooked Tax Deductions

According to Lisa Hay at Betterment:

1. State Sales Taxes

The IRS provides a calculator that shows how much residents of each state can deduct, based on income, number of exemptions, and state and local sales tax rates.

2. Points for Refinancing

These are the fees you pay directly to the lender at closing in exchange for a reduced interest rate.

3. Job Search Expenses

You can deduct job search costs as miscellaneous expenses.

4. Legal Fees Related to Alimony

Although legal fees in a divorce are generally nondeductible, any lawyer fees that you incur while settling alimony are tax deductible.

5. Child Care Credit

You may qualify for a tax credit worth 20% to 35% of what you pay for child care while you work.

6. American Opportunity Credit

This tax credit is good for the first four years of college. It is based on 100% of the first $2,000 spent on qualifying college expenses, and 25% of the next $2,000 for a maximum annual credit of $2,500 per student.

7. Credit for Lifetime Learners

The Lifetime Learning credit can be claimed for any number of years.

It is worth up to $2,000 a year, based on 20% of up to $10,000 you spend for post-high school courses that lead to new or improved job skills. Courses taken at a vocational school or community college can count.

The credit is phased out as income rises from $54,000 to $64,000 on an individual return and from $108,000 to $128,000 for couples filing jointly.

8. Credits for Alternative Energy Equipment Home Improvements

There’s no longer a tax credit for installing storm windows and insulation. However, there is still a credit for installing qualified residential alternative energy equipment on your primary residence, such as geothermal heat pumps, wind turbines, and solar hot water heaters.

9. Reinvested Dividends

This isn’t a tax deduction or credit, but it can result in significant savings if you have mutual fund dividends automatically reinvested and used to buy additional shares.

Reinvested dividends should be added to your tax basis, which will reduce the taxable capital gain (or increase the loss) when you redeem the shares.

Forgetting to include reinvested dividends in your basis results in paying taxes twice on dividends — once in the year when they were paid out and reinvested, and later when they’re included in the proceeds of the sale.

10. Local Exemptions for Municipal Bonds

If you held municipal bond ETFs or mutual funds, a portion of the dividends paid by municipal bond funds may be exempt from state and local tax.

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