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TAXES


The Most-Overlooked Tax Deductions

Estate tax on income in respect of a decedent

This sounds complicated, but it can save you a lot of money if you inherited an IRA from someone whose estate was big enough to be subject to the federal estate tax.

Basically, you get an income-tax deduction for the amount of estate tax paid on the IRA assets you received. Let's say you inherited a $100,000 IRA, and the fact that the money was included in your benefactor's estate added $40,000 to the estate-tax bill. You get to deduct that $40,000 on your tax returns as you withdraw the money from the IRA. If you withdraw $50,000 in one year, for example, you get to claim a $20,000 itemized deduction on Schedule A. That would save you $5,600 in the 28% bracket.

State tax paid last spring

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Did you owe tax when you filed your 2014 state income tax return in the spring of 2015? Then, for goodness' sake, remember to include that amount in your state-tax deduction on your 2015 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.

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.

deducting jury pay graphic

Write it in like this.

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. Include your jury fees with your other write-offs and write "jury pay" on the dotted line.

American Opportunity Credit

Unlike the Hope Credit that this one 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 are “nonrefundable,” meaning they can reduce your tax to $0, but not get you a check from the IRS.) This credit was scheduled to revert to the less-valuable Hope Credit limits in 2018, but in 2015, Congress made the better-for-you American Opportunity Credit permanent.

A College Credit for Those Long Out of College

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 2015, this credit can help pay the bills. The right to claim this tax-saver phases out as income rises from $55,000 to $65,000 on an individual return and from $110,000 to $130,000 for couples filing jointly.

Deduct those blasted baggage fees

Airlines seem to revel in driving travelers batty with extra fees for baggage, online booking 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

There’s no longer a tax credit to encourage homeowners to save energy by, for example, installing storm windows and insulation. But the law still offers a powerful incentive for those 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, the bonus depreciate rate was 50%. The break expired at the end of 2013 and stayed expired until the end of 2014 . . . when Congress reinstated it retroactively to cover 2014 purchases. (That reprieve ended on December 31, when the provision expired again . . . but near the end of 2015, Congress revived the break. The 50% bonus applies for property purchased in 2016 and 2017, too; the bonus drops to 40% in 2018 and 30% in 2019.

Perhaps even more valuable, though, is another break: supercharged "expensing," which basically lets you write off the full cost of qualifying assets in the year you put them into service. This break, too, has a habit of coming and going. But as part of the 2015 tax law, Congress made the expansion of expensive permanent. For 2015 future years, business can expense up to $500,000 worth of assets. The half million dollar cap phases out dollar for dollar for firms that put more than $2 million worth of assets into service in a single year.

Break on the sale of demutualized stock

In 2015, the IRS found another 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. In 2009 and again in 2011, federal courts sided with taxpayers who challenged the IRS position. Late in 2015, though, a divided federal appellate court ruled in favor of the IRS. Sooner or later, the Supreme Court may have to settle things.

In the meantime, if you sold stock in 2015 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 an 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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