With the addition of a higher tax bracket for the wealthy and the elimination of some popular lower-income tax breaks, this year it’s especially important to make sure you’re getting every break you deserve, tax pros say.Lane V. Erickson / Shutterstock.com
As they sit down to prepare their 2013 returns, some wealthy taxpayers are facing a number of tax hikes introduced last year, including a 39.6% tax bracket and an additional 0.9% Medicare tax on wages and self-employment income above a certain threshold. Meanwhile, some low- and middle-income taxpayers are discovering that a number of tax breaks just expired, meaning this tax season could be their last chance to take advantage of them (if Congress doesn’t act to reinstate them).
Unlike underreported income, which is tracked closely by the Internal Revenue Service, tax experts say it’s mostly up to taxpayers and their preparers to make sure they’re getting the tax credits and deductions they qualify for. “If you leave off a deduction or a credit, there is not likely to be a check in the mail from the IRS,” says Mark Steber, chief tax officer at Jackson Hewitt Tax Service. “You need to understand what’s on your tax return this year to make sure you’re getting every credit you can.”
MarketWatch spoke with several tax pros about the tax breaks people often forget to consider. Their picks for the most frequently forgotten credits and deductions:
State and local sales-tax deduction
Most taxpayers end up deducting state and local income taxes, but people who live in states that don’t have an income tax, such as Alaska, Florida, Nevada, Texas and Washington, can benefit from writing off their state and local sales taxes instead, says Jeffrey Porter, a certified public accountant and chairman of the tax executive committee for the American Institute of Certified Public Accountants. Even people who live in states that do charge an income tax may be better off taking the sales-tax deduction if, for example, they paid more in state and local sales taxes than in state and local income taxes, because of big purchases such as a car or a boat, says Porter. The IRS offers a calculator to help people estimate the size of the sales-tax deduction, which expired at the end of last year.
All education-related tax breaks
Taxpayers who took college classes last year, even if they weren’t working toward a degree, can write off up to $4,000 in tuition, books and other related expenses, says Lindsey Buchholz, lead analyst with the Tax Institute at H&R Block. That deduction cannot be claimed by people who are taking the American Opportunity Tax Credit, a break of up to $2,500 that can help people who are still working on their first four years of higher education. Taxpayers should crunch the numbers and be sure they are taking the break that saves them the most money, says Lisa Greene-Lewis, CPA and tax expert for TurboTax, especially since the tuition and fees deduction expired at the end of last year.
Many people don’t realize that job-search expenses, such as the costs of preparing and sending out resumes, traveling to job interviews and any fees paid to an outplacement firm, can be included among other itemized deductions, says Greene-Lewis. But the break is only available to people looking to stay in the same field; people who are changing careers, or who have been out of work for a while, don’t qualify.
People who moved last year for work may be able to write off transportation costs, storage fees and other expenses, and they don’t have to itemize to do so. This break doesn’t apply to any expenses that were covered or reimbursed by the taxpayer’s employer. And the IRS requires that the new job be at least 50 miles farther from the taxpayer’s old home than their previous job was from that home. Employees must also work full time for at least 39 weeks during their first year in their new home.
Non-cash charitable contributions
Most taxpayers are good about talking with their CPA about the monthly check they write to their church or other charitable organizations, but people should also remember to include the value of any items, such as clothing or furniture, they may have donated, says Buchholz of H&R Block. Claiming this break is easier if you keep a detailed inventory of the donated items and get a receipt from the organization receiving the donation, she says. Taxpayers should keep in mind that donated items, especially clothing, will typically be worth less than the amount initially paid for them.
Yes, painful losses incurred at the blackjack table can be written off along with other itemized deductions — but only to the extent that they can offset gambling winnings, which are taxable, says Steber. Taxpayers cannot deduct gambling losses that are more than their winnings, according to IRS rules, and anyone trying to claim this break should have a diary of their wins and losses, as well as some other documentation, such as receipts, tickets, statements or other records showing the amounts won and lost.
Homeowners should remember that the mortgage fees known as “points” that they pay in order to get a lower interest rate when they purchase or refinance a home can be deducted, says Porter. These costs can be deducted all at once when the home is purchased, he says. But when a homeowner refinances, the points need to be deducted little by little each year, over the life of the loan.
More tax stories from MarketWatch:
8 tax filing mistakes to watch out for
Owe the IRS money? Good news
11 key tax changes for 2014
Jonnelle Marte covers health care and taxes for MarketWatch in New York. Follow her on Twitter @Jonnelle.
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