Advisors should have their clients look closely for these potential tax breaks.
As tax day approaches, there’s often a scramble to find just one more tax deduction to lighten the burden on the bottom line.
While leaving the search till the last minute is definitely not the best way to proceed — since many strategies require advance planning and advance action — there are some ways to lessen your clients’ final tax bills that you — and they — may not have considered.
Fortunately, the folks at Kiplinger have gone the extra mile to uncover some ways to cut one’s tax bill that you, your clients or their tax preparer may not already have employed.
Here’s our look at 15 of the ways you might find appropriate to reduce the amount of tax that your clients must pay:
1. State sales taxes
Once a here-again, gone-again deduction, state sales taxes are back to stay. Taxpayers have had the choice of deducting whatever they pay in state sales taxes or state income taxes from their federal returns — although the deductibility of sales taxes has expired at irregular intervals, with Congress deciding just as irregularly to reinstate it.
In December, Congress actually made the choice permanent and approved a retroactive deduction for 2015 taxes. While taxpayers everywhere should be happy to have the choice of deducting whichever tax hit is larger, those who live in states without a state income tax will likely be even happier.
2. Reinvested dividends
According to Kiplinger, even the IRS says that huge numbers of taxpayers miss out on this one. And even though it’s not strictly speaking a tax deduction, reinvestment of mutual fund dividends increases a taxpayer’s tax basis in the fund. Remembering to boost the tax basis of mutual fund shares by the amount in each automatic reinvestment of dividends will save you money at the time you redeem those shares, since it will mean you’re only paying capital gains taxes on those dividends once: at the time you cash in.
Otherwise you could be paying taxes on the dividends twice: once when they’re issued, and again when you sell the shares in which they were reinvested.
3. Out-of-pocket charitable deductions
So you remember to gather receipts when charities come to your door to collect donations of gently used clothing or furniture, and of course when you write checks in response to charitable appeals. But maybe you forget that the cost of the ingredients in meals prepared for a homeless shelter or the pet shampoo used in an animal rescue group’s baths for adoptable dogs is also deductible.
Kiplinger’s points out that if those costs top $250, you need a receipt from the charity in question — and if you drove your vehicle for a charity during the year, you can also deduct 14 cents per mile, as well as parking and tolls, for each trip.
4. Student loan interest paid by parents
The kids get a real break on this one: something they can deduct even though they didn’t actually pay it. Students liable for student loan debt can deduct up to $2,500 of interest on student loans paid by their parents — as long as those students are not being claimed as dependents on their parents’ income taxes. The IRS treats that money as if it were given to the student, who then uses it to pay the debt.
Parents can’t write it off, since they’re not liable for the debt — so why waste the deduction?
5. Job-hunting expenses
It can’t have been your first job, and the job you get has to be in the same field as the one you already have or have just left, but you can write off job-hunting costs as miscellaneous expenses. You must itemize to do this, and you can only deduct those expenses to the extent that your total miscellaneous expenses top 2% of your adjusted gross income — and you can do so even if you didn’t get a new job.
Eligible expenses include such costs as resume and business card printing; postage; food and lodging, if you had overnight trips in your job search; mileage (57.5 cents a mile, plus parking and tolls); cab fares; and fees to employment agencies.
6. Moving expenses to take your first job
If your first job is at least 50 miles away from your old home, you can deduct your moving expenses — and you don’t have to itemize to do it.
Not only can you deduct the cost of getting your household goods to the new area, your mileage — if you drove yourself — is also deductible, at 23 cents per mile, along with parking and tolls.
7. Military reservists’ travel expenses
Members of the military reserve are entitled to deduct the cost of getting to and from drills or meetings — as long as those drills or meetings are more than 100 miles from home and will keep them away from home overnight.
In that case, they can not only write off lodging and meals, but also costs for driving there and back — to the tune of 57.5 cents per mile, plus parking and tolls. And they don’t have to itemize to do it.
8. Deduction of Medicare premiums for the self-employed
If you’ve qualified for Medicare but are still running your own business, you can deduct Medicare Part B and Part D premiums, as well as the cost of supplemental Medicare (medigap) policies or the cost of a Medicare Advantage plan.
While you can’t do this if you’re also covered by an employer-subsidized plan or a spouse’s employer’s plan, those eligible to claim the deduction don’t have to worry about qualifying under the 7.5% of AGI test that applies to itemized medical expenses for those age 65 and older.
9. Child care credit
Those paying for child care while they work can qualify for a tax credit worth between 20% and 35% of what that care costs them. You can’t do this if you pay child care expenses through a child care reimbursement account at work, unless you run through the $5,000 that a reimbursement plan covers.
If, for instance, your account only covers the $5,000, but you have two kids under 13 in care and pay up to $6,000 for their care, you can claim the tax credit for the additional $1,000 — just not on the original $5,000. But that amount is already in pretax dollars, so you still make out.
10. Estate tax on income in respect of a decedent
Say you inherited an IRA from someone whose estate was large enough to cause the federal estate tax to kick in. If the IRA totaled $100,000, and its inclusion in the estate of the person who left it to you increased the estate tax bill by $40,000, you can deduct that $40,000 on your tax bills as you take money out of that IRA.
A $50,000 withdrawal, for instance, would allow you to claim a deduction of $20,000 on Schedule A, thus saving you $5,600 if your own income is in the 28% bracket.
11. State tax paid last spring
If you had to pay your home state additional income tax when you filed last spring, remember to include that additional tax in the state tax deduction on this year’s federal return — along with any state income taxes withheld from your paychecks or that you paid in quarterly estimated taxes during the course of the year.
12. Refinancing points
Buying a house gets you the chance to deduct whatever points you had to pay to get the mortgage. While you can’t do that if you refinance, you can still deduct the points over the life of the loan (for instance, 1/30th of the points annually for a 30-year mortgage). It may not be as big a chunk of a deduction as the one you get while buying outright, but it’s still worth using.
If you sell or refinance again, you can deduct whatever’s left all in that one year — unlessyou used the same lender and refinanced. Then you have to stick with deducting both the old points and the new over the life of the new loan.
13. Jury pay paid to employer
If you had to serve on jury duty and your employer insisted that, in exchange for continuing to pay your salary while you served, you had to turn your jury pay over to the company, you’re still considered by the IRS as receiving taxable income — the jury pay — and you have to report it. However, you get to deduct it so that you’re not paying taxes on money that your employer received.
To do so, go to line 36 and add it into the other items that have to be totaled there — then write “jury pay” on the dotted line.
14. American Opportunity Credit
This is a credit that’s good for all four years of college, and it’s based on 100% of the first $2,000 that you spend on qualifying college expenses and 25% of the next $2,000, for a maximum annual credit per student of $2,500. The full credit is available as long as your modified adjusted gross income is $80,000 or less (for married couples filing jointly, $160,000).
Don’t worry if you didn’t pay enough taxes to use up the whole credit. In those cases, you’ll actually get a refund for the balance.
15. A college credit for those long out of college
The Lifetime Learning credit can get you up to $2,000 annually, based on 20% of up to $10,000 used for post-high-school courses used to bring new or better job skills — and that’s for you, not for your kids. Even if you’re retired and taking classes at a vocational school or community college, those count.
It’s income-dependent, of course, and phases out as your income increases from $55,000 to $65,000 (individual) or from $110,000 to $130,000 (couples filing jointly).
-- See more tax planning content on ThinkAdvisor’s special homepage: 23 Days of Tax Planning Advice: 2016.