TAXES


The Most-Overlooked Tax Deductions

State tax paid last spring

Did you owe tax when you filed your 2012 state income tax return in the spring of 2013? Then, for goodness' sake, remember to include that amount in your state-tax deduction on your 2013 federal return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments during the year.

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, then deduct that amount gradually over the life of the new loan. A pain? Yes, but at least you'll be compensated for the hassle.

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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.)

College credits aren’t just for youngsters, nor are they limited to just the first four years of college. The Lifetime Learning credit can be claimed for any number of years and can be used to offset the cost of higher education for yourself or your spouse . . . not just for your children.

The credit is worth up to $2,000 a year, based on 20% of up to $10,000 you spend for post-high-school courses that lead to new or improved job skills. Classes you take even in retirement at a vocational school or community college can count. If you brushed up on skills in 2013, this credit can help pay the bills. The right to claim this tax-saver phases out as income rises from $53,000 to $63,000 on an individual return and from $107,000 to $127,000 for couples filing jointly.

Deduct those blasted baggage fees

Airlines seem to revel in driving travelers batty with extra fees for baggage and for changing travel plans. 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 costs to your deductible travel expenses.

Credits for energy-saving home improvements

It appears 2013 will be the end of the road—for real—for a tax credit that’s worth 10% of the cost of qualifying energy savers, such as new windows and insulation. (It expired before, in 2011, but was retroactively revived for 2012 and 2013.) If you made qualifying improvements in 2013—and you did not use up the maximum $500 credit (only $200 of which can be for windows) in earlier years—be sure to cash in with your 2013 return.

Another credit for saving energy is still alive, though, and it has no dollar limit. This credit goes to 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

Business owners—including those who run businesses out of their homes—have to stay on their toes to capture tax breaks for buying new equipment. The rules seem to be constantly shifting as Congress writes incentives into the law and then allows them to expire or to be cut back to save money. Take “bonus depreciation” as an example. Back in 2011, rather than write off the cost of new equipment over many years, a business could use 100% bonus depreciation to deduct the full cost in the year the equipment was put into service. For 2013, that bonus depreciation is 50%. That’s still a sweet deal not to be missed if you qualify for a 2013 purchase—it’s just not as sweet as it was earlier.

Perhaps even more valuable, though, is supercharged "expensing," which basically lets you write off the full cost of qualifying assets in the year you put them into service. The dollar limit for expensing seems to change every year. For 2013 purchases, it can apply to up to $500,000 worth. The $500,000 cap phases out dollar for dollar if you put more than $2 million worth of assets into service in 2013.

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 shareholders. 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. Shortly after the IRS won its case in early 2013, the court in one of the earlier cases came up with a complicated method to pinpoint a basis. Rather than agreeing with experts who say the basis should be 100% of the stock’s value at the time of the demutualization, the court’s method set the basis in the case at hand at between 50% and 60% of the stock’s value when the taxpayers received it. Sooner or later, the Supreme Court may have to settle things.

In the meantime, if you sold stock in 2013 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.

Social Security Taxes You Pay

This doesn’t work for employees. You can’t deduct the 7.65% of pay that’s siphoned off for Social Security and Medicare. But if you’re self-employed and have to pay the full 15.3% tax yourself (instead of splitting it 50-50 with your employer), you do get to write off half of what you pay. That deduction comes on the face of Form 1040, so you don’t have to itemize to take advantage of it.

Waiver of Penalty for the Newly Retired

This isn’t a deduction, but it can save you money if it protects you from a penalty. Because our tax system operates on a pay-as-you earn basis, taxpayers typically must pay 90% of what they owe during the year via withholding or estimated tax payments. If you don’t, and you owe more than $1,000 when you file your return, you can be hit with a penalty for underpayment of taxes. The penalty works like interest on a loan—as though you borrowed from the IRS the money you didn’t pay. The current rate is 3%.

There are several exceptions to the penalty, including a little-known one that can protect taxpayers age 62 and older in the year they retire and the following year. You can request a waiver of the penalty—using Form 2210—if you have reasonable cause, such as not realizing you had to shift to estimated tax payments after a lifetime of meeting your obligation via withholding from your paychecks.

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