Tuesday, February 16, 2016

7 Tax Deductions You Need to Know About

It may feel like you just finished filing, but tax time is almost here again. These seven surprising tax deductions will help you achieve your best possible outcome.

1. Other taxes

Most of us know to deduct state, local and property taxes on our federal returns, but many other taxes are also deductible. Foreign taxes may qualify, and co-op owners can deduct their share of the building’s property taxes. Sales tax is another lesser-known deduction. If you’ve made major purchases such as a car or fine jewelry, these savings can be significant.

For the self-employed, Social Security is big tax bite at 15.3% of earned income. But there is a small break; you can deduct 7.65% of that income, the portion your employer would have contributed if you worked as a traditional employee.

2. Bad luck

Tax time might be the silver lining in a dark cloud after a rough year. Major losses may be deductible if they’re not covered by insurance and if they top 10% of AGI. These include:
     Car accidents
     Flood, storm, earthquake and fire property damage
     Terrorist attacks

3. Going back to school

No matter how old you are or how many years you’ve been out of school, you may qualify for a tax break when you hit the books if your course results in new or improved job skills. The Lifetime Learning credit can provide a tax credit of up to $2,000 annually, depending on income level.

4. Retirement savings

Preparing for retirement often brings immediate tax benefit. If you’ve got a 401(k), your annual contributions of up to $18,000 (if 49 or under) or $24,000 (if 50 or older) are automatically tax-deferred. Or deduct up to $5,500 (age 49 or under) or $6,500 (age 50 and older) for contributions to traditional IRA accounts, available at financial institutions like Michigan Community Credit Union.

The best news is it’s not too late to make an IRA contribution for this past year, as long as you contribute by April 15. Those with low to moderate incomes may also qualify for an additional Retirement Savings Contributions credit.

5. Interest paid

Although personal interest expense (such as credit cards) isn’t deductible, many other interest types are. These include mortgage and home equity interest and points, loan interest on boats with living quarters, and student loan interest. Co-op owners can also deduct what they pay toward the building’s mortgage interest.

6. Weird business expenses

Besides typical business expense deductions like office supplies and equipment, some legitimate, odd deductions are also sometimes accepted. A bodybuilder was able to deduct oils used for competition, and a junkyard owner deducted cat food to attract stray cats for rodent control. Additionally, don’t forget to deduct any expenses related to looking for work, such as transportation, resumes and hotels.

7. Gifts to charity

In addition to monetary gifts, non-cash charitable donations may also be deductible. These include items like clothing and vehicles as well as donation expenses such as ingredients to prepare a soup kitchen meal, or parking fees incurred while serving that meal.

Taking advantage of hidden deductions can be the difference between owing the IRS and enjoying a sizeable refund. And the money you save this year may provide the means to make years of future tax deductions possible.

Roberta Pescow, NerdWallet

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