13 Most Overlooked Tax Deductions

A Kiplinger article, “The 13 Most Overlooked Tax Deductions,” gives a list of 13 deductions that we usually forget when filling our tax returns. Among The Unlucky 13 items, I found No. 12, Reinvested dividends, is one that I never heard of. I sold some mutual funds in the past and simply used the difference between the cost basis and the proceeds from the sale to determine the gain, though all the dividend and capital gain distribution were reinvested. However, it’s much easier to figure out the actual costs, which should include your own contributions and fund distributions, if the investment was made as an one-time purchase. If, on the other hand, the investments were made over years through dollar-cost averaging, it could be quite some work to tally the numbers and get the exact cost basis.

Here’s the summary of the 13 overlooked deductions. For detailed explanations of each item, use the above link to read the full article.

  1. State sales taxes: You must choose between deducting state income taxes or state sales taxes and, if you live in income-tax states, the income-tax deduction is a better deal.
    • Enter your state sales taxes write-off on line 5 of Schedule A and write “ST” on the dotted line to the left of that line.
  2. $250 educators’ expenses: Teachers and their aides can deduct up to $250 for books and classroom supplies.
    • If you qualify, put the deduction on line 23 of the Form 1040, the line now used for the Archer medical savings account (MSA) deduction, and write “E” on the dots to the left.
    • If you also claim the MSA deduction, write “B” (for both) on the line and attach a breakdown of how much you’re claiming for each.
  3. College tuition: You may qualify to deduct up to $4,000 you paid in college tuition in 2006 for yourself, your spouse or a dependent.
    • For 2006 returns, the deduction is taken on line 35 of the Form 1040, the line for the domestic production deduction. Write “T” to the left of that line.
    • If you’re claiming the production break, too, write “B” on the dotted line and attach a breakdown of how much you’re claiming for each.
  4. Student loan interest paid by mom and dad: A child who’s not claimed as a dependent can qualify to deduct up to $2,500 of student loan interest paid by mom and dad.
  5. Out-of-pocket charitable contributions: You can write off out-of-pocket costs you incur while doing good works. If you drove your car for charity in 2006, deduct 14 cents a mile.
  6. Moving expense to take first job: If you moved more than 50 miles, you can deduct the cost of getting yourself and your household goods to the new area, including 18 cents a mile (and parking fees and tolls) for driving your own car.
  7. Military reservists travel expenses: To qualify, you must travel more than 100 miles and be away from home overnight. If you qualify, you can deduct the cost of lodging and half the cost of your meals, plus 44.5 cents a mile (and any parking or toll fees) for driving your own car.
  8. Child-care credit: Up to $6,000 can qualify for the child-care credit, but the old $5,000 limit still applies to reimbursement accounts. If you run the maximum $5,000 through a plan at work, but spend more for work-related child care, you can claim the credit on up to an extra $1,000.
  9. Estate tax on income in respect of a decedent: You get an income-tax deduction for the amount of estate tax paid on the IRA balance. Let’s say you inherited a $100,000 IRA, and the fact that the $100,000 was included in your benefactor’s estate added $45,000 to the estate tax bill. As you withdraw the money from the IRA and pay tax on it, you also get to deduct a proportional amount of the estate tax paid.
  10. State tax you paid last spring: If you owe tax when you filed your 2005 state tax return, remember to include that amount with your state-tax deduction on your 2006 return.
  11. Refinancing points: When you refinance a mortgage, you have to deduct the points over the life of the loan. That means 1/30th a year if it’s a 30 year mortgage.
  12. Reinvested dividends: If you have mutual fund dividends automatically invested in extra shares, each reinvestment increases your “tax basis” in the fund. When you redeem shares, the reinvested dividends should be included in your basis, thus reduce your gain.
  13. Jury pay paid to employer: Some employers continue to pay employees’ full salary while they are doing their civic duty but ask that they turn over their jury fees to the corporate treasury. You’ve always had a right to deduct the amount.
    • Enter it on line 13 if you file the Form 1040A or on line 34 if you use the full-fledged 1040.

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