Every year, the IRS dutifully reports the most common blunders that taxpayers make on their returns. And every year, at or near the top of the "oops" list is forgetting to enter their Social Security number at the top of the tax form -- or making a mistake when entering those nine digits.
But think about it for a minute: Do you really think that's the most common mistake ... or simply the easiest to notice?
One thing we know for sure is that the opportunity to make mistakes is almost unlimited, and missed deductions can be the most costly. About 45 million of us itemize on our 1040s -- claiming more than $1 trillion worth of deductions. That's right: $1,000,000,000,000, a number rarely spoken out loud until Congress started tying itself up in knots trying to deal with the budget deficit and national debt.
Another 92 million taxpayers claim about $700 billion worth using standard deductions -- and some of you who take the easy way out probably shortchange yourselves. (If you turned 65 in 2012, remember that you now deserve a bigger standard deduction than when you were younger.)
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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 ran the IRS at the time told Kiplinger's Personal Finance magazine that he figured millions of taxpayers overpay their taxes every year by overlooking just one of the money-savers listed below.
State sales taxes
This is an especially dangerous issue for 2012 returns because, throughout 2012, this tax deduction simply didn't exist. The right for taxpayers to deduct state sales taxes paid expired at the end of 2011. Everyone expected Congress to revive the tax break sometime during 2012, but the issue got tangled up in fiscal cliff negotiations. Finally, in the bill approved January 1, 2013, the deduction was restored ... retroactively for 2012 and for 2013 returns that will be filed next year.
This is particularly important to you if you live in a state that does not impose a state income tax. You see, Congress offers you the choice between deducting state income taxes paid or state sales taxes paid. You choose whichever gives you the largest deduction, of course, and if your state doesn't have an income tax, the sales tax write-off is clearly the way to go.
In some cases, even filers who pay state income taxes can come out ahead with the sales tax choice.
The IRS has tables that show how much residents of various states can deduct, based on their income and state and local sales tax rates. But the tables aren't the last word. If you purchased a vehicle, boat or airplane, you may add the sales tax you paid on that big-ticket item to the amount shown in the IRS table for your state.
The same goes for any homebuilding materials you purchased. These add-on items are easy to overlook, but could make the sales-tax deduction a better deal even if you live in a state with an income tax. The IRS has a calculator on its Web site to help you figure the deduction. (As this is written, the IRS is working to update the calculator for 2012 returns.)
This isn't really a tax deduction, but it is an important subtraction that can save you a bundle. And this is the break that former IRS commissioner Fred Goldberg told Kiplinger's that a lot of taxpayers miss.
If, like most investors, your mutual fund dividends are automatically used to buy extra shares, remember that each reinvestment increases your tax basis in the fund. That, in turn, reduces the taxable capital gain (or increases the tax-saving loss) when you redeem shares. Forgetting to include the reinvested dividends in your basis results in double taxation of the dividends -- once when they were paid out and immediately reinvested in more shares and later when they're included in the proceeds of the sale. Don't make that costly mistake.
If you're not sure what your basis is, ask the fund for help. (Starting with sales in 2012, mutual funds must report to investors -- and the IRS -- the tax basis of shares redeemed during the year. But note this: The new rule applies only to shares purchased in 2012 and later years. If you redeemed shares you purchased prior to 2012, it's still up to you to figure your basis. Don't forget those reinvested dividends!)
Out-of-pocket charitable contributions
It's hard to overlook the big charitable gifts you made during the year, by check or payroll deduction (check your December pay stub).
But the little things add up, too, and you can write off out-of-pocket costs incurred while doing work for a charity. For example, ingredients for casseroles you prepare for a nonprofit organization's soup kitchen and stamps you buy for your school's fundraising mailing count as a charitable contribution. Keep your receipts and if your contribution totals more than $250, you'll need an acknowledgement from the charity documenting the support you provided. If you drove your car for charity in 2012, remember to deduct 14 cents per mile plus parking and tolls paid in your philanthropic journeys.
Student-loan interest paid by Mom and Dad
Generally, you can only deduct mortgage or student-loan interest if you are legally required to repay the debt. But if parents pay back a child's student loans, the IRS treats the money as if it was given to the child, who then paid the debt. So, a child who's not claimed as a dependent can qualify to deduct up to $2,500 of student-loan interest paid by Mom and Dad. And he or she doesn't have to itemize to use this money-saver. Mom and Dad can't claim the interest deduction even though they actually foot the bill since they are not liable for the debt.
If you're among the millions of unemployed Americans who were looking for a job in 2012, we hope you kept track of your job-search expenses ... or can reconstruct them. If you're looking for a position in the same line of work, you can deduct job-hunting costs as miscellaneous expenses if you itemize. Qualifying expenses can be written off even if you didn't land a new job. In any case, such expenses can be deducted only to the extent that your total miscellaneous expenses exceed 2% of your adjusted gross income. Job-hunting expenses incurred while looking for your first job don't qualify. Deductible job-search costs include, but aren't limited to:
- Transportation expenses incurred as part of the job search, including 55.5 cents a mile for driving your own car plus parking and tolls
- Food and lodging expenses if your search takes you away from home overnight
- Cab fares
- Employment agency fees
- Costs of printing resumes, business cards, postage, and advertising