Do you want to minimize your tax bill? Then you need to know about all the deductions and credits available and which ones apply to you. However, if you don't have the time or desire to read tax-prep books in your spare time, then keep an eye out for these five deductions and credits that might save you some money come tax season.
Dependent Care Credit
If you're a new parent, you might not know that you can claim a tax credit called the dependent care credit to offset the expenses you pay to have someone watch your child while you're at work. Examples of allowable expenses include a babysitter, daycare, nursery school and preschool.
To qualify, your child must be younger than 13, you must pay for the child care expenses yourself and the purpose of the expenses must be so that you can work. If you're married, you must file jointly and both spouses must be working (unless one is disabled or a student).
The tax credit is worth at least 20% of your eligible expenses up to a maximum of $3,000 for 1 child and $6,000 for two or more children. The maximum credit is 35% of your expenses if your adjusted gross income (AGI) is $15,000 or less. Essentially, the credit will give you $600 to $1,050 to reimburse your child care expenses for one child and $1,200 to $2,100 total for two or more children. The credit probably pales in comparison to your actual child care costs, but every little bit helps.
Do you give bags of old clothes and household items to the Salvation Army or another tax-exempt charity? You can take a tax deduction for these used items if they are in acceptable condition. Clothing, furniture, electronics, appliances and linens are examples of items that qualify for this deduction. You should keep records of your donation that show the charity's name, the date and location of your donation, and a reasonably detailed description of the items you donate.
You can only claim the fair market value of these items, which will generally be much less than what you paid for them. The Salvation Army publishes a guide to valuing these items based on what it sells them for in its store. For example, it puts the value of a women's blouse at $3.00 to $14.40, a men's jacket at $9 to $30, and a complete double bed at $60 to $204.
You may want to limit your deductions in this category to $500 per year because the IRS's recordkeeping requirements increase substantially when your donations exceed this amount.
Unlike cash and noncash donations, the IRS does not provide any deductions or credits for the time you donate to your favorite charity. However, if you spend money out of pocket in the course of performing your volunteer duties, you are entitled to some modest tax deductions.
The miles you drive are deductible at a rate of 14 cents per mile. You can also deduct what you spend on parking, tolls, materials and supplies, fundraising, phone calls and some travel expenses. This deduction maxes out at $249, unless you get a written statement from the charity confirming your contributions of $250 or more.
Moving Expenses Incurred Because of a Change in Where You Work
Even if you don't itemize, you can deduct the money you spend to pack and move your belongings as well as some storage, insurance, personal transportation and lodging costs associated with the move. Furthermore, there's no limit on the deduction amount you can claim.
To qualify for this deduction, your new job must be at least 50 miles farther from home than your old job was. You also have to work full-time in the new location for at least 39 weeks in the 12 months after you move (but if you get laid off through no fault of your own, you don't have to meet the time test).
Points are a fee that some home buyers choose to pay at closing, in order to lower their mortgage rates. One point is equal to one percent of the mortgage; so on a $100,000 mortgage, one point would cost $1,000.
If the seller pays the buyer's points, the buyer (yes, the buyer) may deduct the points as prepaid mortgage interest. For home buyers with a marginal tax rate of 25%, a tax deduction for $1,000 in points would slash $250 off your tax bill. You have to itemize to claim this deduction. Also, if you have more than $1 million in mortgage debt, you can't claim this deduction.
When you sell your home, you'll have to deduct the points the seller paid from your home's cost basis. This calculation could reduce your tax-free capital gains on the sale of your home. However, you'll have to sell your house for $250,000 more than you paid for it ($500,000 for married couples) before you'll need to worry about this catch.
The seller can count the points as a selling expense and use them to increase the home's cost basis and reduce any capital gains tax on the home's sale.
The Bottom Line
Remember to always keep complete and accurate records like bank statements, credit card statements, canceled checks and receipts to substantiate your deductions and credits, in case you are audited. Also, if you discover a deduction or credit that you should have taken in the past but didn't, you have up to three years to file an amended tax return and get some money back.