The Most-Overlooked Tax Deductions

State tax paid last spring

Did you owe tax when you filed your 2011 state income tax return in the spring of 2012? Then, for goodness' sake, remember to include that amount in your state-tax deduction on your 2012 federal return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments.

Refinancing points

When you buy a house, you get to deduct in one fell swoop the points paid to get your mortgage. When you refinance, though, you have to deduct the points on the new loan over the life of that loan. That means you can deduct 1/30th of the points a year if it's a 30-year mortgage. That's $33 a year for each $1,000 of points you paid -- not much, maybe, but don't throw it away.

Even more important, in the year you pay off the loan -- because you sell the house or refinance again -- you get to deduct all as-yet-undeducted points. There's one exception to this sweet rule: If you refinance a refinanced loan with the same lender, you add the points paid on the latest deal to the leftovers from the previous refinancing -- and deduct that amount gradually over the life of the new loan. A pain? Yes, but at least you'll be compensated for the hassle.

Jury pay turned over to your employer

Many employers continue to pay employees' full salary while they serve on jury duty, and some impose a quid pro quo: the employees have to turn over their jury pay to the company coffers. The only problem is that the IRS demands that you report those jury fees as taxable income. To even things out, you get to deduct the amount you give to your employer.

But how do you do it? There's no line on the Form 1040 labeled jury fees. Instead the write-off goes on line 36, which purports to be for simply totaling up deductions that get their own lines. Add your jury fees to the total of your other write-offs and write "jury pay" on the dotted line.

American Opportunity Credit

Unlike the Hope Credit that this one has temporarily replaced, the American Opportunity Credit is good for all four years of college, not just the first two. Don't shortchange yourself by missing this critical difference. This tax credit is based on 100% of the first $2,000 spent on qualifying college expenses and 25% of the next $2,000 . . . for a maximum annual credit per student of $2,500. The full credit is available to individuals whose modified adjusted gross income is $80,000 or less ($160,000 or less for married couples filing a joint return). The credit is phased out for taxpayers with incomes above those levels. If the credit exceeds your tax liability, it can trigger a refund. (Most credits can reduce your tax to $0, but not get you a check from the IRS.)

Deduct those blasted baggage fees

In recent years airlines have been driving passengers batty with extra fees for baggage and for making changes in travel plans. All together, such fees add up to billions of dollars each year. If you get burned, maybe Uncle Sam will help ease the pain. If you're self-employed and travelling on business, be sure to add those cost to your deductible travel expenses.

Credits for energy-saving home improvements

One of these credits is worth 10% of the cost of qualifying energy savers such as new windows and insulation. The maximum credit for 2012 is $500 (only $200 of which can be for windows).

What’s more, that $500 is the maximum you can claim on all your tax returns from 2006 to 2013. If you claimed $250 in 2007, for instance, you can only claim $250 this year. (Note: In 2009 and 2010, the limit was temporarily raised to $1,500. If you claimed more than $500 in credits for energy-savers in those years, don't worry -- you don’t have to give anything back.)

But there's no dollar limit on the separate credit for homeowners who install qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines. Your credit can be 30% of the total cost (including labor) of such systems installed through 2016.

Additional bonus depreciation

A break that allowed business owners -- including those who run businesses out of their homes -- to write off 100% of the cost of qualified assets placed in service expired at the end of 2011. Although Congress did not extend this break retroactively as part of the fiscal cliff deal, bonus deprecation didn't disappear completely – it's available at the 50% level for qualified assets purchased in 2012.

Perhaps more valuable is a break Congress did make retroactive for 2012 purchases. The lawmakers restored a supercharged “expensing” provision -- which basically lets you write off the full cost of new assets in the year you put them into service. While the dollar limit for expensing had fallen to $139,000 worth of assets for 2012, the fiscal cliff deal boosted the cap to $500,000. Note that the right to use expensing phases out if you put more than $2 million worth of assets into service in 2012

Break on the sale of demutualized stock

In 2013, the IRS finally found a court that agrees with its tough stand on the issue of demutualized stock. That's stock that a life insurance policyholder receives when the insurer switches from being a mutual company owned by policyholders to a stock company owned by stockholders. The IRS's longstanding position is that such stock has no tax basis, so that when the shares are sold, the taxpayer owes tax on 100% of the proceeds of the sale. In 2009 and again in 2011, federal courts sided with taxpayers who challenged the IRS position. Those courts didn’t say what the basis of the stock should be, but many experts think it's whatever the shares were worth when they were distributed to policyholders. In 2013, though, a different court upheld the IRS’s zero-basis position . . . so the matter remains up in the air (and probably on its way to the Supreme Court).

If you sold stock in 2012 that you received in a demutualization, you have a couple of choices. Claim a basis and, if the IRS rejects your position, file an appeal. Or, use a zero-basis, pay the tax on the full proceeds of the sale and then file a "protective refund claim" to maintain your right to a refund if the matter is eventually settled in your favor.

Tax-free transit subsidy

The fiscal cliff deal signed by President Obama's autopen on January 2 brought a retroactive break for commuters who use public transit to get to work in 2012. Last year, folks who drove to work could receive up to $240 tax-free from their employers to cover the cost of parking. But, due to a glitch in the law, workers who used mass transit were limited to $125 a month tax-free to pay for their bus, subway and train rides to the job. The new law brings parity to the tax break, hiking the tax-free limit for transit expenses to $240 ... retroactive to January 1, 2012.

If your employer offers a transit-subsidy program and you spent more than $125 a month in 2012, you could be due a refund of both income and Social Security taxes. Check with your human resources office.