By Ken Clark
Due to the overwhelming and ever-changing nature of the
Let's take a look at six expenses that can save taxpayers a substantial amount.
The Child Care Tax Credit
People are consistently surprised to learn that preschool and after-school care can actually earn them a sizable tax credit that directly reduces the amount of tax they owe. Of course, like all deductions and credits, there are rules that outline who qualifies and how much of their expenses are eligible.
In this case, the Child Care Tax Credit allows a parent to claim a credit of up to 35% on the first $3,000 in expenses for a child (or the first $6,000 for two or more children), as long as the following conditions were met:
- The child was your dependent and under 13 (or incapable of caring for themselves if older).
- The parent could not work, or look for work, without childcare.
- The daycare provider must meet certain other IRS qualifications. (For more information on this credit, see Give Your Taxes Some Credit, Tax Credits You Shouldn't Miss and Taxing Times For Divorced Parents.)
The Retirements Savings Contribution Credit rewards a taxpayer's retirement plan contributions by providing a tax credit equal to 10-50% of the amount contributed. In a best-case scenario, this could reduce a taxpayer's amount owed to the IRS by $500 for every $1,000 contributed. Currently, the largest benefits of this credit are offered to lower income tax payers. However, many affluent parents are helping their recently launched adult children to take advantage by gifting the money needed to contribute to a plan, allowing them to claim the full credit.
To receive the Retirement Savings Contribution Credit, a taxpayer must make less than the IRS specified limits, not be claimed as a dependent on anyone else's tax return, and not be a full-time student.
State and Local Income or Sales Tax
If you paid income tax to your state or local government when you filed last year's income tax return, that amount is now deductible on this year's federal tax return. Many taxpayers often miss out on this deduction because it is so far in the past that they don't remember, or they can find their tax records to deduct the correct amount.
If you find yourself in the position of having paid substantial sales taxes (especially resulting from a large purchase such as a car) in the prior year, these may be deducted instead of your state and local income taxes. One of the best ways to accurately estimate your total sales tax is by looking at all your credit and debt card purchases for the year, subtracting your out-of-state purchases, and multiplying the remaining total by your sales tax rate.
Many homebuyers, in order to secure a lower mortgage rate, pay upfront "points" to their lender. These points, which may range from a fraction of one percent to two or more percent, are generally deductible on most taxpayers' return. Unfortunately, many people forget about this substantial sum, only remembering to deduct the actual mortgage interest itself.
The full amount paid as mortgage points is deductible in the year it was paid as long as the mortgage meets certain conditions (such as the home being a buyer's principal residence, the points being within industry standards, having proper documentation, etc). Points not meeting the standard requirements are still deductible, but must be spread out evenly over the life of the loan. (For more on this read, Mortgage Points - What's The Point? and A Tax Primer For Homeowners.)
Moving, even across town, can be a costly endeavor. Thankfully, the IRS allows taxpayers to deduct unlimited move-related costs as long as the move is job-related. Even better, this deduction is one of just a few "above the line" deductions, meaning it can still be deducted even if the taxpayer has no other deductions and opts for the standard deduction.
Of course, such a generous deduction comes with strict rules to minimize abuse by overzealous taxpayers. Requirements for claiming the moving expense deduction include:
- Your new workplace must be at least 50 miles further away from your home than your previous workplace.
- You are employed full-time in the new position, for at least 39 weeks in the 12 months following the move.
- The expenses are not reimbursed by your employer.
Being your own boss has a lot of perks, but having to pay double what W-2 employees pay for the FICA payroll tax is not one of them. With few exceptions, both employers and employees have to contribute 7.65% of an employee's wages to the FICA (Social Security and Medicare) system. When you're your own boss, you're on the hook for both sides of this contribution, or 15.3% of your total wages on top of the normal income tax.
To ease this burden, the IRS allows self-employed individuals to deduct one half of the total self-employment tax owed for the year. Like the moving expense, this is an "above the line" deduction that can be claimed even if the taxpayer has no other itemized deductions. (Keep reading on this subject in An Overview Of Itemized Deductions and Next Season, File Taxes On Your Own.) Personal Income Tax Guide: Common Filing Mistakes
TaxesYour children can help you save on your taxes with these credits and deductions.
TaxesThe amount of money you save by paying your mortgage off quickly will far exceed any benefit from the mortgage interest tax deduction.
TaxesThis strategy of moving your tax deductable payments and donations to the following year could mean hundreds more on your return.
TaxesFind out about these deductions and how you can use them to lower your tax bill.
RetirementFiling your taxes during retirement can be just as time consuming as when you were employed. We have some tips to help you out.
TaxesRunning your own business has both personal and financial perks.
TaxesHere are the major changes and tips that you need to know before filing your taxes for 2013.
TaxesBe sure to read the fine print about any deduction or credit that you’re planning to claim.
TaxesDeclaring noncash donations and volunteer work expenditures are just some of the lesser-known ways to reduce your taxes.
TaxesMost U.S. taxpayers will be familiar with the 1040. By the end of filling it out, you'll know how much tax you owe, or what your refund is.