Attention taxpayers: A few little-known and often overlooked benefits of this tax-filing season may reduce your taxes.
Tax credits, exemptions and deductions range from newer credits for electric cars to a little-used, penalty-free way to give a small but quick boost to your income.
“There have been a lot of opportunities for a while,” said Jack Jacobs, a certified public accountant and partner with Jacobs and Jacobs Accountancy Corp. in Thousand Oaks and Ojai, Calif. “It’s a matter of being able to spot them.”
Deductions and exemptions reduce taxable income while credits are a dollar-for-dollar tax reduction, and more powerful.
People overlook these ways of saving money for many reasons, and sometimes because they never think items could be tax-free, Jacobs said.
Qualified capital gains dividends are one example, he said. These gains, or the profit made when a security is sold at a higher price than it was bought at, may be taxed at smaller amounts than income or not at all for those in a 15 percent income tax bracket.
That’s because most people add their capital gains onto their income by habit, Jacobs said.
“I’m sure many people miss it; it’s easy to miss,” Jacobs said. “They’re surprised it’s not being taxed.”
College tuition has generated a tax credit up to $2,500 but the law changed in 2010 to include related expenses such as books, according to the Internal Revenue Service. The credit also was expanded to four years of tuition, compared to two.
Jacobs said tax filers can deduct the interest on up to $100,000 of a home-equity loan on their main residence and use it to pay off credit card debt.
“This is a great way to convert nondeductible credit card interest into a deduction,” he said.
Cars are also a little-known source of deductions.
One deduction is a newer “green” credit of up to $7,500 for taxpayers who bought plug-in electric vehicles, according to the IRS.
Jacobs said those who purchased new cars can add the sales tax to the amount provided by IRS tables, which are based on income, and deduct the total if it exceeds what state income tax is paid.
“A lot of people overlook that — the comparison (between the sales tax and state income tax),” he said. “This works best for people who pay very little state income tax.”
Child adoptions, which can involve traveling several times to a foreign country, also receive a little-known federal tax credit.
In 2009, 80,676 tax returns nationally included the adoption tax credit, according to the IRS.
Taxpayers who legally adopted a child in 2011 can get up to $13,360 toward related costs, Jacobs said. 2011 was the peak for the credit, and it drops in 2012, he said.
There also is a deduction for donating securities to charities.
Taxpayers who donate investment securities that have gone up in value can get a deduction for the value based on the donation date rather than pay capital gains tax, Jacobs said.
“You can see if you sell first, you have to pay tax on the gain,” he said. “But if you donate directly, you can just chop out the capital gain.”
And should those at least age 59 1/2 need a boost in their income, they can take money out of their Individual Retirement Account, or IRA, without paying the standard penalty, Jacobs said. They still have to pay income taxes on it.
The Earned Income Tax Credit provides more benefits to America’s low- to moderate-income earners than any government program, according to the IRS.
The agency estimates that one in five taxpayers who qualify don’t claim the credit, mostly because they don’t know about it, the agency says.
The credits range from $464 for people with no children to $5,751 for those with at least three eligible children.
A single person with no eligible children must earn less than $13,660. That minimum rises for those married with children.
Contact Carol Lawrence of the Ventura County Star in California at CLawrence@vcstar.com