The complexity of the code leaves many Americans feeling hopeless and confused when filing their tax returns. Many of us view tax returns as no more than expensive and tedious tasks to get out of the way at year-end, like renewing vehicle tabs. This common experience of unknowing, apathy and dread causes millions of missed tax deductions every year.
Those who are familiar with the code find all kinds of ways to lower tax. But, you don’t have to be a high-income earner utilizing complicated “loopholes” to reduce your tax liability. There are many easy to claim deductions and credits available. Here are some of the ones you might not know about.
Educator Expenses – An above the line deduction
Above the line deductions are those that are deducted before arriving at adjusted gross income (AGI). These are nice deductions since many credits are calculated, or phased out, based on your AGI. The Educator Expense deduction is small in comparison to many other deductions, but basically any teacher qualifies.
If you spend 900 hours or more teaching kindergarten through grade 12 you are eligible for this deduction. The IRS will allow a deduction of up to $250 for expenses such as books, supplies, equipment and other materials. Let’s face it, pretty much any teacher spends at least this amount each year.[i]
Retirement Savings Contribution Credit
This credit exists to encourage lower-income taxpayers to set aside money for retirement. It is available to Single taxpayers whose AGI is below $28,750 or married couples with AGI below $57,500.[ii] Depending on your AGI, you can get a credit ranging from 10% to 50% of your retirement contributions, up to a maximum credit of $1,000.
Qualifying contributions are those made to a Traditional or Roth IRAs and elective deferrals to 401k, 403b, 457, SEP or SIMPLE plans. The credit amount is reduced by any distributions from similar plans during the year the credit is claimed.
Residential Energy Credit
There are really two credits under this umbrella term: the Nonbusiness Energy Property Credit and the Residential Energy Efficient Property Credit. Both credits vary in amount depending on the eligible expense or property. For both credits, manufacturer certification is required and for some expenses they must meet or exceed the Energy Star requirements.
The Nonbusiness Energy Credit is available for energy-efficient improvements such as windows, doors and insulation that are designed to reduce heat gain or loss. The qualifying costs and maximum credit depend on what type of property is purchased or improved.
The Residential Energy Efficient Property Credit is available for expenses such as solar heating and power or geothermal heat pumps.
Sales Tax Deduction for Large and Unusual Purchases
The IRS allows an itemized deduction for either state income tax or state sales tax. In a state with no income tax sales tax is always deducted. While some people may save receipts and add them up at year-end, most just take the deduction using the IRS table. The deduction for sales tax is calculated based on your AGI and is often equally or more beneficial than what you would come up with after adding up all your receipts.
What many don’t know is that you can add additional sales tax on large and unusual purchases to the amount from the IRS table. The table amounts are an estimate of sales tax for yearly average sales tax on regular purchases. As such, they do not take into account large amounts of sales tax incurred when purchasing a vehicle or remodeling a home. For this reason, the IRS will allow you to add tax on such large and unusual purchases to the sales tax table amount. You can also add local taxes to the table amount.
Miscellaneous Itemized Deductions
There is a section on Schedule A (where you deduct itemized deductions) for ”Miscellaneous Itemized Deductions.” These deductions are limited so that only the amount of expense that exceeds 2% of your AGI is deductible. To put that in perspective, let’s say your AGI is $25,000 and you have $750 of miscellaneous deductions. In this scenario, only $250 of the $750 is deductible (2% of $25,000 is $500 so only the amount exceeding $500 is deductible).
Here are the most common miscellaneous itemized deductions:
- Investment expenses – up to the amount investment income
- Unreimbursed employee expenses such as travel, professional/union dues and safety equipment and tools.[iii]
- Tax preparation fees
- Certain legal expenses
[i] The expenses are not deductible if reimbursed by your employer.
[ii] These are the 2012 amounts.
[iii] These expenses are claimed by filing Form 2106.