5 overlooked tax deductions for families
No one looks forward to April 15. For busy families, preparing a tax return can prove stressful -- not to mention costly. But part of the problem is that too many families fail to take all the deductions to which they are entitled.
"What I take for granted, many filers don't have any clue about," says Peter Baum, partner with the Harrison, New York, office of accounting firm O'Connor Davies, LLP. "A finance person might understand all the deductions available. The average person, no."
The deductions noted below may save your family some dollars this tax season. Remember though, you only want to itemize your deductions if your deductions total more than the IRS' standard deduction. For married taxpayers filing jointly, the standard deduction for the 2014 tax year is $12,400.
1. Medical expenses
Eric Green, a tax attorney in the New Haven, Connecticut, office of law firm Green & Sklarz, says that families might be able to reduce their tax burden by claiming medical expenses. But there are some caveats.
Medical expenses are tax deductible only if they total more than 10 percent of a family's adjusted gross income for the year. This means that for most families, medical costs would have to be fairly significant to generate enough expense to qualify for a deduction. But if someone in the family lost a job, dramatically reducing the family's income, it is possible that medical expenses could reach that 10 percent threshold.
If they do, it's important for families to claim these expenses. They can shave a significant amount of money off the taxes they owe.
Timing is key though, Green says. This is advice that families should heed this year in preparation for next tax season. If you have a medical bill for a late-in-the-year procedure, you might want to pay it before Jan. 1, even if the bill isn't due that soon. That way, you can claim it on your taxes the following April 15.
"Timing plays a role in so many tax decisions," Green says. "It's about accelerating your expenses in a given year and deferring your income for that same year. That's one way to maximize your deductions. You can do this with your medical expenses."
2. Job-search costs
Were you or your spouse looking for a job this year? The expenses involved in hunting for that job can be deducted as miscellaneous expenses if you itemize your deductions, says Michael Atias, tax director at Irvine, California-based financial education company Online Trading Academy.
Again though, there are some rules. First, your total miscellaneous expenses, including the expenses you incurred looking for a job, must be more than 2 percent of your adjusted gross income for you to deduct them.
If your miscellaneous expenses hit this threshold, you can deduct transportation expenses that you paid while searching for a job, including 56 cents a mile for driving your own car plus any parking fees or tolls that you paid, Atias says. You can also deduct food and lodging expenses if you have to spend an overnight stay while searching for your next job. Cab fares, employment agency fees and the costs of printing resumes are all deductible too.
You don't even have to have been successful in your attempts to find work.
"Qualifying expenses can be written off even if you didn't land a new job," Atias says.
3. State sales taxes
Some states don't have income taxes. But this doesn't mean that the residents there are out of luck when it comes to deductions. If you live in a state with no income tax, you can instead write off all the state sales tax that you paid during the year, says Baum.
This can pay off if you've made a big purchase during the year. If you bought a boat or car, those deducted sales tax dollars can have a big impact on your tax bill.
If you live in a state with low income taxes, you might still consider deducting your sales taxes instead of your income taxes to help boost those itemized deductions. Remember, you can only deduct state income taxes or sales taxes, not both.
4. Profitable hobbies
Cal Brown, adviser with Savant Capital Wealth Management in McLean, Virginia, says that if you already spend money on a hobby, you might be able to reduce your taxes by turning that hobby into a business. For instance, Brown plays guitar. During some years, he gave private lessons out of his home. He was then able to deduct the money he spent on guitar supplies on his taxes.
"I was spending money on strings, picks and other supplies anyway, so I turned my hobby into a business and deducted some of those expenses," Brown says.
A key guideline here is that you can only deduct purchases that are actually used for a business. Eventually, you also need to show a profit from your hobby-turned-business. If you don't show a profit in at least three of the prior five years, the IRS will classify your business as a hobby, and you won't be able to deduct any expenses associated with it.
5. Care for relatives
Do you provide a home or financial support for relatives who aren't your children? You might be able to claim a dependent exemption of $3,950 this year for any extra relative -- of the non-child variety, of course -- whom you support.
Again, you must meet certain requirements to earn an extra dependent exemption. First, the person you support must be a relative or a full-time member of your household and must be a citizen or resident of the United States or a resident of Canada or Mexico.
These relatives must not have filed a joint income tax return with anyone else and must receive more than half of their financial support from you. The relative must also have earned less than $3,950 in 2014.
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