Taxpayers often overlook possible tax deductions that are available to them or were created by recent tax law changes. This results in paying more taxes than needed. Listed below are a few deductions that may be of help in computing your current taxes.
• Moving expenses to take your first job. Job-hunting expenses incurred while looking for your first job are not deductible, while moving expenses to get to that first job are deductible. They are deductible even though you do not itemize your deductions. This deduction should help a number of new college graduates or individuals moving to take a new job reduce their first year's taxes. The requirement is that you must move more than 50 miles from your current residence. You can get a deduction for moving yourself and your household goods to the new area. This deduction includes 16.5 cents per mile for driving your vehicle, plus parking and tolls.
• State tax paid last spring. Did you pay state income taxes on your prior year tax return, or pay a fourth quarter estimate in the following year? Then, remember to include the total state taxes paid in 2010 on your tax return as an additional itemized state tax deduction. This deduction would be in addition to any withholding you had in 2010 or any estimate of payments made during that year.
• American Opportunity Credit. This is a credit of up to $2,500 for college tuition and related expenses paid during the year. It is available to individuals with incomes less than $80,000 and married couples with incomes less than $160,000. The credit is phased out for taxpayers with incomes above those levels. It is available to cover all four years of college and if it exceeds your tax liability, it is refundable.
• Making work pay credit. This is a little known tax benefit, which can provide individuals with a tax credit of $400 or a couple with $800. This credit is equal to 6 1/2 percent of your earned income and must be claimed on schedule M.
• Sales tax deduction for new vehicles. Taxpayers can deduct state sales taxes paid on the purchase of a new vehicle. The deduction is limited to the first $49,500 of the vehicles purchase price. This deduction is phased out when the taxpayer's gross income is over $125,000 if filing as single or $250,000 if married filing jointly.
• Credit for energy saving home improvements. An energy tax credit is available for residential non-business installation of energy property. This includes exterior doors and windows, insulation, heat pumps, furnaces, central air conditioners and water heaters. The maximum credit of $1,500 applies to qualified energy efficiency improvements.
• Increased depreciation utilizing Costs Segregation. This is a little known technique that is available on investment or commercial properties to accelerate depreciation into the beginning year's real estate is held rather than spread the depreciation out over a longer term. Cost Segregation also permits going back in time and recapturing depreciation that was available but not deducted. This deduction alone can save thousands of dollars of taxes.
What is a tax deduction worth? The value of a tax deduction is the incremental percentage tax cost. The tax rate percentage depends upon your taxable income when compared to the tax table. As an example, a $1,000 missed deduction for a married couple filing jointly earning between $68,000 and $137,300 would be worth 25 percent in federal taxes, thus you are paying $250 more than needed. This is why it is extremely important to know all available tax deductions that would be allowed in order to pay the lowest possible tax.
• Ken Lindow, CPA, MBA, lives and works in Ahwatukee Foothills. Contact him with tax questions or column topic ideas at (480) 940-8351 or Ken@LindowCPA.com.