Each year, Americans continue to overlook tax breaks that may have put money back in their pocket. While many taxpayers would prefer to pay the IRS as little as possible, the complexities of the tax code often lead to missed opportunities to minimize tax liability. With IRS statistics suggesting that 45 million Americans are expected to itemize their deductions and collect over $1.2 trillion, it is critical to educate yourself on the most common overlooked deductions before you file.
Job hunting deductions
Americans on the hunt for a new job may be able to deduct certain expenses as a miscellaneous expense. (Miscellaneous expenses are deductible in excess of 2 percent of AGI) From employment agency fees and printing costs for business cards and resumes to lodging & transportation costs if you must travel and stay overnight in search of work, there are many overlooked deductions that may be available. Keep in mind, mileage for driving your own car (54 cents per mile) plus parking and tolls can also be deducted. Unfortunately, job hunting expenses for your first job are not deductible. Review IRS Publication 529 - Miscellaneous deductions for additional information.
Moving expenses for a new job
Despite the fact that you cannot deduct job hunting expenses for your first job, moving expenses may be deductible for any job. The catch is that you must be relocating to a new job that is at least 50 miles farther from home than your previous job. If that is the case, you may be eligible to deduct a portion of your moving expenses including mileage (19 cents for 2016, 17 cents for 2017), parking and tolls. Consider reviewing IRS publication 521.
Student loan interest deduction
It is not uncommon for parents to help their children pay off student loans. However, it is common for parents and their children to overlook the student loan interest deduction. Interestingly, if parents pay back a student loan incurred by their children, the IRS views this as if money was given to the child who subsequently paid the debt. A child who’s not claimed as a dependent can qualify to deduct up to $2,500 of student loan interest paid by their parents – at least the child receives a deduction.
Tax credits for college
The commonly overlooked American Opportunity Tax Credit (AOTC) may help reduce some of the out-of-pocket expenses associated with paying college tuition. The maximum $2,500 credit per eligible student is available for qualified education expenses paid for the first four years of higher education toward a degree with a credit of 100 percent of the first $2,000 of qualified education expenses paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses paid. Even if the credit pays your tax down to zero, you can still receive 40 percent of the remaining amount of the credit (up to $1,000) refunded to you - not too bad. Your modified adjusted gross income or MAGI must be $80,000 or less for single filers, $160,000 or less for married filing jointly. The credit phases out completely if your MAGI is over $90,000, $180,000 for joint filers.
Lifetime Learning Credit
Unlike the AOTC, the Lifetime Learning Credit is not limited to the first four years of higher education. You can claim 20 percent of up to $10,000 in eligible costs, for a maximum credit of $2,000. Tuition payments to a post-secondary school (after high school) are considered qualified expenses and the credit is available for any post-secondary classes you take that lead to new or improved job skills.
Keep in mind, eligibility phases out from $55,000 to $65,000 in MAGI for single filers and from $110,000 to $130,000 for joint filers. Unfortunately, you are unable to double-dip and claim both tuition credits. For most students working toward a four-year education, the American Opportunity credit may provide greater tax savings. See Publication 970 - Tax Benefits for Education for additional information.
Child and Dependent Care tax credits
If you paid expenses for the care of a qualifying individual to enable you (and your spouse, if filing a joint return) to work or actively look for work, you may be able to claim the child and dependent care. The amount of the credit is a percentage of the amount of work-related expenses you paid to a care provider for the care of a qualifying individual. The percentage depends on your adjusted gross income and is between 20 and 35 percent of your allowable expense.
The total expenses that you may use to calculate the credit may not be more than $3,000 (for one qualifying individual) or $6,000 (for two or more qualifying individuals). Expenses paid for the care of a qualifying individual are eligible expenses if the primary reason for paying the expense is to assure the individual's well-being and protection. Keep in mind, If you received dependent care benefits that you deduct from your income as part of a pre-tax reimbursement account at work, you must subtract the amount of those benefits from the dollar limit that applies to you.
Section 179 business deduction
This deduction allows businesses to expense up to $500,000 on new and used equipment, as well as off-the-shelf software. There is a spending cap of $2,000,000 that can be spent on equipment before the deduction is reduced dollar for dollar. In other words, businesses that spend more than $2.5 million on equipment are unable to take advantage of Section 179. (Larger businesses that are unable to take advantage of Section 179 may be able to utilize 50% bonus depreciation for new equipment.)
Most taxpayers remember to deduct monetary charitable contributions. However, it is not uncommon for taxpayers to miss opportunities for additional tax savings. While you are unable to deduct the value of your time spent supporting a charity, you can deduct other costs associated with your volunteering - especially supplies, uniforms and travel costs. The deduction for mileage is 14 cents per mile and can add up. Detailed records are a must so be sure that you can substantiate your deductions with supporting documentation. See IRS Publication 526 for additional information.
Taxes can be complex and working with a CPA professional may help you take advantage of deductions that apply to your situation. Since everyone's situation is unique, consider speaking to your tax and financial adviser to determine the best approach for you.
Kurt J. Rossi, MBA, CFP®, CRPC®, AIF® is a CERTIFIED FINANCIAL PLANNERtm Practitioner & Wealth Advisor. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com, bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC.