Tax Breaks
The 11 Most Overlooked Tax Deductions
Plus four new breaks taxpayers likely will miss this year.
By Kevin McCormally, Editorial Director, Kiplinger.com
February 2009
Advertisement
Every year, the IRS dutifully reports the most common blunders taxpayers make on their returns. And every year, at or near the top of the "oops" list is forgetting to enter a Social Security number or making a mistake when entering those nine digits at the top of the tax form.
Before you bemoan such stupidity of your fellow Americans, ask yourself a simple question: Is that the most common error? Or just the most easily noticed goof?
Who knows how many people forgot -- or never knew about -- a deduction that could save them money? That's not the kind of thing government bean counters lose a lot of sleep over.
No doubt about it: The opportunity for mistakes is almost unlimited. The most recent numbers show that about 46 million of us itemized deductions on our 1040s -- claiming nearly 1 trillion dollars' worth of deductions. That's right: $1,000,000,000,000, a number rarely mentioned out loud until Congress started debating the latest stimulus package.
Another 85 million taxpayers claimed more than half a trillion dollars' worth of standard deductions. Some of those who took the easy way out probably shortchanged themselves. (If you turned 65 in 2008, remember that you deserve a bigger standard deduction than younger folks.)
Yes, friends, tax time is a dangerous time. It's all too easy to miss a trick and pay too much. Years ago, the fellow who was running the IRS at the time told Kiplinger's Personal Finance magazine that he figured millions of taxpayers overpaid their taxes every year by overlooking just one of the money-savers listed below.
Start with the 11 most-overlooked tax deductions. Then check out our final four breaks that are new this year and all but certain to be overlooked by far too many taxpayers. Claim them if you deserve them, and cut your tax bill to the bone.
1. State sales taxes. Although all taxpayers have a shot at this write-off, it makes sense primarily for those who live in states that do not impose an income tax. You must choose between deducting state and local income taxes or state and local sales taxes. For most citizens of income-tax states, the income-tax deduction is a better deal.
IRS has tables that show how much residents of various states can deduct. But the tables aren't the last word. If you purchased a vehicle, boat or airplane, you get to add the state sales tax you paid to the amount shown in IRS tables for your state, to the extent the sales tax rate you paid doesn't exceed the state's general sales tax rate.
The same goes for home building materials you purchased. These items are easy to overlook, and these add-ons could make the sales-tax deduction a better deal even if you live in a state with an income tax. The IRS even has a calculator on its Web site to help you figure the deduction, which varies depending on the state where you live and your income level.
2. Reinvested dividends. This isn't really a deduction, but it is a subtraction that can save you a bundle. And, this is the break former IRS Commissioner Fred Goldberg told Kiplinger's that lots of taxpayers miss.