This is a guest post by a practicing accountant who I personally know and trust. If you are looking for an accountant, shoot us an email and we’ll get you in touch with him.
As the tax filing season approaches, I thought it would be beneficial to the CCC readers for me to list some of the common tax deductions that I see people miss on a regular basis.
1. Miscellaneous Charitable Deductions
Most folks understand that big charitable gifts made to qualifying non-profits are appropriate deductions on Schedule A (itemized deductions). But what many miss out on are the small gifts, the mileage to and from your charitable activities, supplies, and other miscellaneous expenses incurred as a part of your charitable activities.
If you drive your car to and from charitable events, you can deduct 14 cents for each mile driven. If you prepared and provided a meal for a nonprofit, the cost of the supplies is deductible. Any parking fees, tolls, or other travel expenses are also deductible.
Remember to keep receipts and do your best to keep a mileage log for all the charitable deduction expenses you will be claiming.
2. Moving Expenses for Your First Job Out of University
So you landed your first professional gig after college. That’s great! If you moved at least 50 miles away from your old home, you can deduct your moving expenses (even if you don’t itemize deductions).
You can deduct the fees and expenses of getting you and all of your belongings to your new location. You can also deduct 24 cents for each mile you drove your own car to the new location along with parking and tolls.
3. Tax Preparation Fees for the Self-Employed
If you pay someone to prepare your tax return and have self-employment income, you can deduct the portion of your fees attributed to your business on Schedule C, E, or F. Many times I see prior year tax preparation fees taken on Schedule A, which must clear a 2% hurdle of adjusted gross income. This is just crazy lingo from the IRS minions. All you need to know is this: If you put your tax prep fees on Schedule A, you probably won’t receive an actual deduction.
The other benefit of subtracting tax prep fees on Schedule C is the avoidance of self employment taxes. You save the 15.3% self-employment tax plus your federal and state income taxes. A double whammy of a deduction!
4. Dividend Reinvestment Program
If you’ve been following the Cash Cow Couple’s advice of living below your means and investing, there is a good chance you will be building up some passive investment income. Some of that cash comes back to you in the form of dividends. Since you understand the benefits of compounding, there is a good chance you have chosen to automatically reinvest all dividends back into the index fund.
This is good news for your tax bill! With each dividend that you reinvest, you are increasing your tax basis position in the fund. This means that when it comes time to sell, you will only pay capital gains on the sale price less the initial investment less dividends reinvested. Many folks miss this and end up paying capital gains on the sale price less only the original investment.
Since this may get tedious for you to track, make sure to ask your fund company for help (ask your accountant, too). In 2012 and going forward, the fund company must report these items to you and the IRS so hopefully the tracking will become easier for you, the investor, as we move forward.
5. Retirement Savings Contribution Credit
Were you aware that the government might pay you to save for retirement? Pretty cool indeed. You may be eligible for a tax credit for making contributions to your IRA or employer-sponsored retirement plan.
To qualify, you must be 18 or older, not a full-time student, and not be claimed as a dependent on another person’s return. The credit is 50%, 20%, or 10% of your retirement plan contribution up to $2,000 or $4,000 if you are married filing jointly. The credit is non refundable, so they will not cut you a check for this amount.
See the following for a nice chart from the IRS to help determine if you are eligible for the credit.
Bonus Tip: If you are brave, you can file your tax return early, claim any credits, and hopefully obtain your (potential) refund before April 15, then fund a portion of your 2013 IRA with that money (as you can contribute to a 2013 IRA any time before April 15)! I wouldn’t try this method unless you already have the cash set aside as there is no guarantee you will get your refund in time to make the contribution before the deadline.
Those are some of the commonly missed (or misplaced) deductions that I see during tax season. Do you have tax questions you’d like answered? Ask them below in a comment, and I’d be glad to answer!
Author Bio: Gabe is a practicing CPA based in the midwest. He currently serves clients across the country.