Although tax season may seem like light years away, there are steps you can take now to bump up your refund.
To get more money back from Uncle Sam, consider putting in the extra work to itemize your deductions. According to the most recent IRS data from 2009, about 45 million Americans claimed more than $1 trillion in deductions by itemizing on their 1040s. Meanwhile, an estimated 92 million taxpayers claimed $700 million through standard deductions--but some who took the easy way out might have cost themselves.
To help you get the most from your tax return, U.S. News consulted four certified public accountants: Steven Albert of Glass Jacobson in Owings Mills, Md., Melissa Labant of the American Institute of CPAs, Dennis Newman of Sharrard, McGee, & Co. in Greensboro, N.C., and Sandy Stolar of EisnerAmper LLP in New York City. They identified the deductions taxpayers most frequently miss:
Medical and dental care expenses. Currently, individuals are allowed to deduct medical and dental expenses on their tax return if the costs exceed 7.5 percent of their adjusted gross income (AGI), but that threshold will be increased next year to 10 percent as a result of the Patient Protection and Affordable Care Act. Eligible medical deductions are expenses incurred under a doctor's prescription. In other words, "if you just want to take vitamins, you can't deduct that," notes Albert.
People often forget to deduct travel expenses incurred to receive medical care, says Stolar. If you can't make the trip on your own, a portion of a companion's lodging expenses may be eligible for a medical deduction as well.
Those receiving Social Security frequently don't take the Medicare Part B deductions they're entitled to, Newman says. "If you're a retiree or disabled, depending on your income, money is withheld from your Social Security check and that's considered health insurance premiums, which are deductible," he says.
If you're the parent of a child with special needs and he or she must attend a specialized school, you may be able to deduct enrollment expenses, says Albert.
Child and dependent care credit. Although this isn't technically a deduction, it's a valuable tax credit that's frequently overlooked. If you have a dependent child (or children) younger than 13, you may be eligible for a credit for the costs of a childcare provider and certain childcare programs. Eligible childcare programs include before- and after-school care and day camps, but not overnight camps. For married couples to qualify, both spouses must work, or the non-working spouse must be a student or disabled. Parents with one child are eligible for a credit based on the first $3,000 of childcare expenses, and parents with two or more children can get a credit of up to $6,000.
Similarly, if you have a dependent parent who lives with you and can't physically take care of him or herself, you can receive a credit for the costs of caring for your parent. Such costs may include adult day care and in-home care.
Contributions to charity. Check and cash contributions to charities are generally fully deductible up to 50 percent of your adjusted gross income. Labant says people are fairly good about keeping track of those donations, but many don't deduct for costs incurred while doing work for a charity. These costs include mileage while volunteering for charitable organizations, which was $0.14 per mile for 2011, and out-of-pocket expenses, such as ingredients for a bake sale.
Labant adds that taxpayers should also look at their December paystubs, since many employees have charity contributions automatically deducted from their payroll.
Taxpayers can also deduct non-cash gifts to charity, like clothes to Goodwill, but make sure to save receipts for these types of donations.
State sales and income taxes. Taxpayers can choose between deducting state and local sales taxes or state and local income taxes. Residents in states without an individual income tax, such as Florida and Nevada, will automatically take the sales tax deduction. In states with sales taxes, few people keep all their receipts throughout the year, so the majority will use the IRS table as an alternative for calculating their state and local sales-tax deduction.
The IRS table is for figuring deductible sales tax based on where an individual lives, his or her income, and the size of the family. In addition to the amounts calculated on the table, an individual can add to his sales-tax deduction for each year the state and local sales taxes are paid on purchases and leases of cars and on purchases of boats and airplanes, plus sales tax paid on other large purchases determined by the IRS (e.g., major home renovations).
In higher income-tax states, most people will opt for the income-tax deduction, since the income-tax deduction is often a bigger burden than the sales-tax deduction.
Home mortgages and refinances. Homeowners that meet certain requirements are eligible to immediately deduct all points paid to obtain a home mortgage on the original purchase of their main home.
However, if you refinance your original loan, the points paid on the new loan must be deducted over the life of the loan. For example, if you take out a 10-year mortgage at the beginning of the year, you can deduct 1/10th of the points each year--equivalent to $1,000 a year for each $10,000 of points paid on the loan. If, however, you take out a bigger loan than your first mortgage, any points paid on amounts used for substantial improvements on the home may be deducted immediately.
Job-hunting expenses. These include resumes, job counselors, mileage costs if the job you're applying for is local, and overnight travel, so long as the new employer doesn't reimburse you. If you're looking for your first job, you can't deduct these expenses.
Costs incurred while hunting for a position in the same line of work as your previous job can be written off as miscellaneous expenses, as long as you itemize and your total miscellaneous expenses are more than 2 percent of your AGI. Other miscellaneous expenses include tax-preparation fees, costs for job-related uniforms, union dues, and subscriptions to job-related newspapers and trade journals.
Moving costs for a job. Given the exceedingly tight job market, many people are forced to move for a job. The good news: You don't have to itemize to qualify for this write-off. According to the IRS, you can deduct the reasonable expenses of moving your household goods and yourself (or your family) from your old home to your new home. Such expenses include the cost of lodging (but not meals) while traveling to your new home.
If you're moving for a job, Stolar says you must satisfy a two-part test. The first is the distance test: Your new workplace must be at least 50 miles farther from your old home than your old workplace was. For example, if your old workplace was 10 miles from your old home, your new workplace must be at least 60 miles from the old home. If this is your first job, your new workplace must be at least 50 miles from your old home. The second part is the time test: You must work full-time in the general area of your new workplace for at least 39 weeks during the first year after the move; if you're self-employed, you must work a total of at least 78 weeks during the first two years.
Deductions for the self-employed. If you're self-employed, you can deduct home-office expenses per a few conditions, namely that the space be used strictly for work. Most of the deduction is determined by the size of the office. For instance, if the office takes up 10 percent of your home, that means 10 percent of your annual electricity bill is tax-deductible.
Stolar says self-employed individuals can receive a full deduction for their health insurance, dental insurance, and long-term care insurance, so long as their self-employment income (less certain deductions) is greater than their health insurance premiums. In this case, it's a page one deduction, where the individuals would not have to itemize and the 7.5 percent AGI threshold does not apply.
Self-employed workers can also deduct baggage fees incurred while traveling for business. For frequent travelers, those costs add up.
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- adjusted gross income