Tax time is near. Seven commonly overlooked deductions.
Taxes are almost due, and the IRS tax code is full of little-known (yet legal) deductions that you could and should use. Seven pointers from a CPA.
When it comes to taxes, there's no such thing as "perfect," unless you're looking at a perfect storm. And we've got one this week, as millions of tax payers — and the overworked accountants representing them — deal with the combined effects of a late-starting tax season, the Passover holiday this week, and Easter Sunday on March 31 all a mere two weeks before the ever-dreaded April 15 filing deadline. Makes you want to go out and buy the Easter Bunny a tax-deferred annuity, eh?
But before you throw your copy of Turbo Tax into a turbo-charged blender, remember that the I.R.S. tax code is full of little-known (yet legal) deductions you could and should utilize. To learn more about these caveats, dealnews spoke with Don Zidik, a CPA at McGladrey LLP in Boston, MA. Zidik, who is a member of the American Institute of Certified Public Accountants, was happy to help us out with seven solid pointers and commonly overlooked tax deductions.
Closing Time: The Real Estate Tax Deduction
If you purchased or sold real estate in 2012, one overlooked deduction may be the real estate taxes paid at closing. That said, be careful how the numbers line up: "You'll need to review your settlement statement to see if you'd been credited with paying real estate tax that needed to be prorated through the closing date," Zidik says. "Likewise, you may also need to reduce your real estate tax deduction if a portion of the real estate tax had been credited to the other party in the sale."
Miles Ahead: Mileage Related to Medical or Charitable Reasons
People who might otherwise count every mile when it comes to work-related travel often skip this deduction because they're not aware it exists. Do make sure you check the respective rates, though, which vary. "The medical mileage rate is 23 cents per mile, and the charitable mileage rate is 14 cents per mile," Zidik says.
Your Tax Lesson Plan: Unreimbursed Classroom Expenses for Teachers
While teachers won't hit the jackpot with this deduction, it certainly pays: Federal law allows teachers to deduct up to $250 of unreimbursed classroom expenses. "This deduction is taken as a deduction before you determine adjusted gross income," Zidik says. And for all teachers who fail to take this elementary deduction, please see me after class.
Expenses That Pay Off: Non-Employee Compensation from Form 1099-MISC
If you received one of these 1099s from 2012, that opens the door to deductions you can take as a consultant or non-employee. "This [deduction] is especially important if this type of income is subject to self-employment taxes," Zidik says. That said, those who derive a majority of their income via 1099-MISC statements need to be careful, as the I.R.S. scrutinizes such tax returns more carefully when deciding who to audit. Use your head and save receipts and keep accurate records for everything you deduct.
The Silver Dollar Playbook: Use Gambling Losses to Offset Big Winnings
If you can prove you lost money gambling, you won't have to pat any tax on your winnings, so long as your losses are equivalent, Zidik says. Of course, that means you really lost as much as you won, which should be a sobering thought.
Returns and Investments: Fees on Your Investment Managed Account
If you have an investment managed account, review your statements and supplementary information with your 1099 to see if you paid any investment management fees or margin interest, Zidik says. Of course, you may need the help of a great CPA to spot all this out. "Investment fees and other miscellaneous deductions are only deductible for those expenses that exceed 2% of your adjusted gross income," he notes. Margin interest is also limited to net investment income, but you can carry it forward to future years. "There are also limitations if you received any tax-exempt income such as municipal bond interest. Expenses need to be allocated between taxable and tax-exempt income." In other words, no double dipping!
Medicare Money: Premium Deductions
Medicated deductions apply if you or someone you know received Social Security benefits in 2012. In that case, the applicable Medicare premiums may be deductible. "This is one overlooked deduction," Zidik says, adding that the Medicare premiums fall under the category of deductible medical expenses. That said, remember that they must exceed 7.5% of your adjusted gross income.
Tax time is never pleasant, but nabbing a few extra deductions where you didn't expect them can make it a little more digestible. That said, remember to take great care when calling in those deductions. Be honest, because audits can and do happen, especially for those who are self-employed or file a Schedule C on their tax returns.
Note: Special thanks to Shirley Twillman at the AICPA for making this interview possible.
Lou Carzolo is a contributor to Dealnews.com, where this article first appeared.