There are a lot of lines on that tax return of yours.
Have you researched each and every one, making sure you're taking
advantage of all the legal ways you can cut your tax bill? Not many
people do. Even some tax professionals miss opportunities
to reduce a taxpayer's tab.
Have no fear -- the Fool is here, giving you the scoop on
the top 10 most overlooked tax credits and deductions. Drumroll,
please...
1. Educator expenses
If you're a teacher or school administrator, you just might qualify for a deduction
that will allow you to reduce your taxable income. According to a
recent study by the National Education Association, the average K–12
teacher spends approximately $400 annually out of her own pocket for
classroom supplies. In the past, many teachers would take those
expenses as deductions on their tax returns as "miscellaneous itemized
deductions." But since only those miscellaneous itemized
deductions that exceed 2% of adjusted gross income (AGI)
reduce taxable income, most teachers didn't see any benefit.
However, there is an "above the line" deduction available
to certain teachers and administrators that allow for a $250
deduction for qualified supplies. Check out line 23 on Form
1040 or line 16 of Form 1040A. You don't have to itemize your
deductions to claim this deduction, and there are no income limitations.
2. Retirement savings contribution credit
If you
make a contribution to virtually any retirement account
(e.g., IRA, 401(k), 403(b), 457), you may be eligible for this credit.
You really have to dig for this one, since most people won't even look
at the retirement contribution information reported on their W-2
forms. Even if you use a computer program -- such as Intuit's
TurboTax -- to complete your return, it's possible to overlook
reporting your 401(k) contributions. This credit is limited to the
lower level of the income spectrum, but if you qualify, it's a
wonderful (and relatively easy) way to cut your taxes. Check out line
48 of Form 1040 or line 32 of Form 1040A.
And don't forget: You still have until April 15, 2004, to make a 2003 contribution to your IRA. Visit our IRA Center for details.
3. Self-employed health insurance
If you're
self-employed and pay qualified health-insurance premiums, you will
find a nice surprise on Form 1040, line 28. For 2003 you may be
eligible to deduct 100% of your qualified health-insurance premiums (up
from 65% last year). Review the instructions for this deduction since
it can get a bit tricky. But if you qualify for this deduction, it'll
save you a bunch of money as compared to taking these expenses as a
medical deduction on your itemized deduction schedule.
4. Student loan interest deduction
This is
another way to reduce your taxes without having to itemize your
deductions. As you are likely aware, most interest paid for personal
expenses is no longer deductible. But the Congress has carved out an
exception for student loan interest.
And you don't have to use Schedule A in order to claim this little gem.
There are income limitations, and if your student loans are large,
it's possible you won't receive a deduction for all
the interest that you paid. But for the majority of taxpayers,
this is an overlooked way to lower your tax bite.
5. Loan points
Did you overlook the deduction for the points that you paid on
that new loan? Many people do. Generally, the points that you pay
for a loan on a new purchase are immediately deductible, while those
paid for a refinance of an existing loan must be deducted on a pro-rata
basis (amortized) over the life of the loan. But once that loan is
repaid (normally through selling the home or another refinance),
the unamortized portion of the loan points can be immediately deducted.
6. Tuition and fees deduction
The education credits aren't the only ways you can shave a few dollars off of your tax liability. If you're taking qualified college courses,
it's possible that you can claim a deduction for these expenses. While
there are income limitations, it's another "above the line" deduction
that you can claim even if you don't itemize your deductions on
Schedule A.
7. Adoption credits
Uncle Sam understands that
adoption proceedings can be an expensive undertaking, which is why the
Small Business Job Protection Act created a nonrefundable credit for qualified adoption expenses
and a new exclusion for employer-provided adoption assistance programs.
Congress created these new tax benefits out of a belief
that financial costs should not be a barrier to adoption, and
to encourage the adoption of children with special needs. This
could lead to as much as a $10,000 tax credit for those who have
incurred qualified adoption expenses.
8. Worthless stock
How about those shares of
stock that you bought with high hopes, only to see the down payment on
your dreams crash and burn? Many are still not aware that a deduction
is allowed for those worthless shares. Even
if your stubs aren't technically worthless, selling them to a
non-related person (such as an in-law) will allow for the deduction in
the year of sale.
9. Credit card payments
Did you buy your
business computer near the end of the year and charge it? Did you use
your credit card to donate to your favorite charity during the
holidays? You might think that you have to wait until you pay that
credit card bill before you can take the deduction, but that's not
the case. The IRS treats a credit card charge like any other loan,
so you receive the deduction in the year that the charge was made, not
in the year that the credit card bill was paid.
10. Charitable and medical travel
Do you use
your auto for charitable purposes? If so, you can deduct 14 cents per
mile for all qualified charitable travel. Not only that, you can deduct
your out-of-pocket expenses when you are serving a qualified
organization. For example, Scout leaders can deduct the cost of
uniforms. But what you can't deduct is the value of your time that
you donate to a charitable cause.
It's likely that you also use your auto for medical travel, such as
to and from your doctor and dentist visits. For 2003, medical travel is
12 cents per mile. And if you have to travel a great distance for
medical treatment, the actual cost of the travel (such as airfare) and
lodging can also be deductible.
It's not too late
Did you miss any of these
deductions? Hopefully not. But if you did, you can always file an
amended tax return to recoup your overpaid taxes.
Related Links:
Before You File Your Taxes
IRA Center
If you like the way Roy Lewis simplifies confusing tax issues, check out his just-published book, The Motley Fool's Investment Tax Guide 2002: Smart Tax Strategies for Investors. This handy 360+ page guide covers just about every tax aspect of a typical Fool's life: investing, marriage, children, education, homes, home offices, retirement accounts, medical expenses, and much more.)
February 27, 2004
