It is more critical than ever for taxpayers to learn what deductions they are entitled to before they file their returns. Here is a list of some commonly overlooked deductions.
Teachers who pay for education-related expenses out of pocket are allowed to deduct up to $250 worth of these costs. This is an above-the-line deduction that does not require itemization. Married filers who are both teachers can each take a separate deduction for a total of $500.
Tangible Items Gifted to Charity
Most taxpayers know that they can deduct cash gifts to charity, but never think to deduct the value of noncash items such as clothing, furniture or toys that they give away. Although it may be necessary to consult a tax advisor about how to properly assign value to these items, the amount that you may be eligible to declare as a deduction might surprise you. However, remember to get a written receipt or you may not be able to justify the deduction in an audit.
Alternative Energy Equipment
Although the credits for energy-efficient home improvements have now completely phased out, taxpayers can still take a deduction for equipment that creates alternative sources of energy, such as wind turbines, solar-powered water heaters and heat pumps that use geothermal energy. The credit is for 30% of the cost of these items, and there is no dollar limit of any kind on this credit, which is currently set to last until 2016.
Section 179 Expensing
Although many business-related expenses can be deducted over time by claiming depreciation, there are many items that can be completely deducted in the year they are purchased. Section 179 of the tax code provides a list of items that can be written off immediately, subject to an aggregate dollar threshold ($125,000 for 2012, $139,000 when adjusted for inflation). The acceleration of deductions can drastically reduce the amount of income that taxpayers have to report in some cases.
Qualified business property that is purchased in 2012 (new, not used equipment) and meets certain other conditions, such as having a "useful life" of no more than 20 years, is eligible for an additional 50% of bonus depreciation for the year. Items that fall into this category include office or business furniture and equipment, farm and agricultural buildings, and other improvements to land. This type of deduction is superior to Section 179 expensing in two ways: it can result in a deductible net operating loss and is also not subject to an aggregate dollar limit.
Compensation for Jury Duty Paid to Employer
Many employees who are called for jury duty still receive their normal compensation from their employers while they sit in court. Their employers will then request that the employees sign over their pay for their service to the jury as partial compensation. If this happens, the employee needs to be sure to deduct the amount of pay signed over or else you are getting taxed on income that you never had the chance to use.
Student Loan Interest Paid by Parents
Students who can no longer be claimed as dependents by their parents can still take a deduction for the interest that their parents paid if their parents made the payments on their student loans for them that year. Parents have never been allowed to deduct interest paid on loans for children who are no longer dependents, but the IRS now considers payments made under these circumstances as being a gift, for tax purposes, to the child. Because the child student is considered to have received the money and used it to make the loan payments, he or she can take a deduction of up to $2,500 for the interest paid.
The Bottom Line
These are just some of the less common tax deductions that are frequently overlooked. For more information on tax deductions, visit the IRS website at www.irs.gov or consult your tax or financial advisor.