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Commonly Overlooked Tax Deductions - Check These Before You File Your Tax Return

written by: Patricia Tokar, CPA•edited by: Donna Cosmato•updated: 3/31/2011

Filling out your income tax return can be stressful. Once you've finally finished your Form 1040, check for these common missed tax deductions. If you discover that you have missed one of these tax deductions, credits, or adjustments - you may just save yourself some tax dollars.

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    Itemized Deductions

    Many taxpayers just assume that they are not eligible to itemize deductions on their tax return, but they may not realize everything that is deductible. The Schedule A is a ripe area for common missed tax deductions. Commonly overlooked itemized deductions include:

    Job Search Expenses: (Miscellaneous Itemized Deduction) Include mileage, resume printing, expenses to travel to/from interviews, other direct costs of searching for a job. This could be a large deduction for many taxpayers this year.

    Tools, Uniforms, Union Dues, Safety Equipment: (Miscellaneous Itemized Deduction) Includes most items purchased for your job that are required by your employer but not reimbursed.

    Mileage Reimbursement Difference: (Miscellaneous Itemized Deduction) If your employer reimburses you for your business mileage, but the reimbursement rate is lower than the IRS standard rate, then you may be entitled to deduct the difference.

    Financial management and planning expenses: (Miscellaneous Itemized Deduction) If you had an attorney prepare a trust, paid a financial planner, paid to have your tax return prepared (including the cost of tax preparation software for self-preparers), subscribed to an investment newsletter, paid a tax attorney for advice, or incurred other costs to manage your finances, then these may be deductible.

    Real Property taxes: Of course, this includes taxes paid on your residence, but it also includes taxes paid on other properties, such as a second residence, a vacation property, a vacant lot, or any other real estate.

    Time share owners: Check your yearly maintenance fee. If real property taxes are listed as a separate line, then this should be deductible.

    If you sold a home in 2010: Check your settlement statement. The real property taxes you paid at closing should be deductible.

    Medical mileage: (Medical Deduction) - mileage to/from doctor appointments, treatments, even the miles to/from the drugstore to pick up your prescriptions.

    Charitable mileage: Did you make deliveries or pickups for your church? Boy scouts? Meals on Wheels? Any other charitable organization? Mileage for a charitable organization should be deductible in the Gifts to Charity section.

    Mortgage Insurance Premiums: If you purchased or refinanced a house in 2007 or later, you may be able to deduct the mortgage insurance premiums that you paid. Income limits and some other restrictions apply.

    Sales tax deduction: Be sure to compare the amount of your state and local income tax deduction to the sales tax tables. You are entitled to take whichever one gives you the largest deduction.

    Prior Year State Tax: If you owed state income taxes when you filed last year, and you paid the balance owing in 2010, then you should be able to deduct it as an itemized deduction.

    Continue reading on page two for more information about common missed tax deductions.

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    Many people miss deductions that could reduce their tax load. This list offers insight into the most common missed tax deductions.
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    Teaching Supplies

    If you are a qualified (see IRS instructions) educator, such as a teacher, principal, aide, counselor for a school, then you may deduct up to $250.00 of necessary books, supplies, equipment, software that you purchased for and used in your classroom.

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    College Tuition - Higher Education Deduction

    If you had expenses for higher education, such as college tuition, and your income was too high to qualify for the education credits (see Form 8863), you may still be able to deduct your college tuition. Fill out Form 8917 to see if you qualify. If so, this would be deducted on line 34, Tuition and Fees Deduction, of your 2010 Form 1040.

    In fact, even if you did qualify for the American Opportunity Credit or Lifetime Learning Credt, you should still check to see if you get a larger benefit by taking the Tuition and Fees Deduction.

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    Self-employed Health Insurance Deduction

    If you are self-employed and pay for your own health insurance (not through an employer-sponsored plan), then you may be able to deduct the premium payments on Line 29 of your 2010 Form 1040. If you are paying for Medicare insurance, that may also be deductible as self-employed health insurance. The Medicare insurance payments deducted from your social security check is another common missed tax deduction.

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    Health Savings Account Contributions

    If you had out-of-pocket medical expenses in 2010 and you have a health savings account ( HSA ) and you have not made your full 2010 contribution, then consider making a 2010 contribution (up to April 18 2011) and then immediately reimbursing yourself from the HSA. This creates a deduction from income without any net cash outlay.

    Alternatively, if you have extra funds, you can simply make a 2010 contribution to your Health Savings Account (up to April 18th), making sure that you do not over contribute.

    For more information on Health Savings Accounts - Setting Up and Using a Health Savings Account

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    Exceptions to the Early Distribution Penalty

    If you took an early withdrawal from your IRA, 401(k), SIMPLE IRA, or other pension-type plan, then you probably owe a 10 percent (or even 25 percent) early distribution penalty on the withdrawal. Check Form 5329 for exceptions to the penalty (but not the income tax). These include: first-time home purchase, higher education expenses, health insurance premiums while unemployed, payment of medical expenses that exceed 7.5 percent of adjusted gross income, and more.

    Page three finalizes the discussion of common missed tax deductions.

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    The more deductions a person finds when filing income taxes, the more money they will save.
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    Penalty on Early Withdrawal of Savings

    Did you cash in a CD before it matured? The bank probably charged a penalty for this. Look for the amount on your 1099-INT. Report it as a deduction on Line 30 of your Form 1040.

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    Claiming a Parent as a Dependent

    Talk with your CPA, tax professional, or tax attorney about this one; it can be tricky. However, you should at least be aware that if you are supporting your parent(s), you may be able to claim them as a dependent, even if they are not living with you.

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    Foreign Tax Credit

    Look at your 1099-DIV. Is there a line or box showing an amount for Foreign Taxes? If the total amount of foreign tax from all your 1099-DIV forms is less than $300 ($600 joint), then you may be able to simply write this in on Line 47 of your Form 1040 and take it as a credit. Refer to Form 1116 and the instructions. Note that this is a credit, which directly reduces the tax on your return.

    Alternatively, you may be able to take this amount as an itemized deduction, but check first to see if you are eligible to take it as a credit, since the credit is a direct subtraction from the taxes due and usually gives a bigger reduction in your taxes.

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    Retirement Savings Contribution Credit

    If your income was below $27,750 ($55,500 joint), and you made a 2010 contribution to your IRA, 401(k), and/or certain other qualified retirement plans, then you may be eligible for a credit of up to $1000.00 ($2000 for couples). Review Form 8880.

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    Capital Gains and Qualified Dividend Rates

    While this is not a deduction, many taxpayers overlook calculating the more favorable tax rates on qualified dividends. (Look at Box 1b of your 1099-DIV). Your rate on these could be as low as 0 percent. Yes, you read right - possibly zero tax on these. Use the Qualified Dividends and Capital Gain Worksheet to figure this tax. Purchasing tax preparation software or using a tax professional may be a consideration in this calculation.

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    One Final Check

    You've checked and double checked your tax return, and you've looked for the most common missed tax deductions. However, before you mail it in, compare it to last year's return. The differences should be explainable. If not, you may be missing a deduction.

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    Legal Section

    This article is not intended to be specific tax advice. It is intended as a general guideline only. Any specific advice should be sought from your tax professional.

    CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Department guidelines, any federal tax information contained in this article, or any attachment, does not constitute a formal tax opinion. Accordingly, any federal tax advice contained in this communication, or any attachment, is not intended or written to be used, and cannot be used, by you or any other recipient for the purpose of avoiding penalties