Fact is, taxes make it harder for you to reach your financial goals, by steadily eroding your income and investment earnings. As part of your long-term strategy to build up your net worth, you should do everything you can to legally minimize the taxes you pay.
That means you shouldn't let the deductions and credits you deserve slip through the cracks. It's hard to believe that while many folks love to complain about taxes, those same people may be failing to take advantage of the many legal tax breaks available to them. Come tax time, don't needlessly cheat yourself.
Maintaining tax-smart records is always a good idea. Keeping track of your deductible expenses will save you from a world of pain if the IRS decides to audit you. Nowhere is incomplete record keeping more deadly than in an audit because without documentation, any of these deductions are likely to be disavowed by the IRS in an audit. That means, when applicable, you should pay by check and credit card, or insist on cash receipts.
I recently spoke with a few accountants, who told me that the following tax deductions and credits are the most commonly overlooked by their clients:
1) Reinvested dividends.
If you're set up to have mutual fund dividends automatically plowed into buying more shares, don't forget that each reinvestment boosts your tax basis in the fund. That, in turn, lowers the taxable capital gain (or increases the tax-saving loss) when you redeem shares. Neglecting to factor reinvested dividends into your basis results in double taxation of the dividends, once in the year when they were paid to you and reinvested, and afterwards when they're included in the sales proceeds.
2) Job-seeking costs.
The unemployment rate in the U.S. is now at a relatively low 5%, but that figure masks "underemployment." Millions of people are still looking for work, perhaps you're one of them. You can deduct several aspects of any job hunt, including transportation expenses, food and lodging, employment agency fees, costs of printing a resume, etc.
3) Deduction of Medicare expenses for the self-employed.
The rise of home-based businesses is a huge but underrated trend that's transforming the U.S. economy. Many factors are fueling this "megatrend," including the flexibility of the Internet, the emergence of new technological tools, the nonconformism of Millennials, and the corporate downsizing of baby boomers who aren't ready to go out to pasture. This is the new face of retirement in America.
It all adds up to a big paradigm shift. People who run their own businesses after qualifying for Medicare can deduct the premiums they pay for Medicare Part B and Medicare Part D, in addition to the expense of supplemental Medicare policies or the cost of a Medicare Advantage plan.
4) Child-care credit.
You can qualify for a tax credit worth between 20% and 35% of what you pay for child care while you work. A "credit" is considerably more beneficial than a deduction, because it lowers your tax bill dollar for dollar. So ignoring this credit is even worse than missing a deduction that simply lowers the amount of income that's subject to tax.
5) Mortgage refinancing points.
When you purchase a house, you can deduct the points paid to obtain your mortgage. When you refinance, you must deduct the points on the new loan over the life of the loan. You can deduct 1/30th of the points a year if it's a 30-year mortgage.
6) Airline baggage fees.
Yep, you read right: This is your chance for revenge against airlines that are socking you with ever-rising fees. If you're self-employed and traveling on business, add those cursed fees to your deductible travel expenses.
7) Legal fees paid to obtain alimony.
About one in every two marriages ends in divorce. Because alimony is taxable income, you can deduct the portion of the lawyer's fee that is attributable to designating the amount. You can also deduct the portion of the fee that is attributable to tax advice.
8) State sales and income taxes.
Many filers neglect to include state sales and income taxes paid as deductions. If you live in a state without an income tax, adding up all the tax you've paid on personal and household items can save you a lot of money.
9) Home remodeling.
As underscored by the rising fortunes of home improvement giant Home Depot, the housing rebound is fueling a remodeling boom. If you remodeled your existing home, be sure to deduct the state sales tax for building materials if you're itemizing.
10) Military travel.
If you belong to the National Guard or are a military reservist, portions of your travel expenses for attending meetings or drills more than 100 miles from home and overnight stays are deductible. You're doing your duty for Uncle Sam; this is your chance to get something back.