5 Neglected Tax Deductions that Can Save You Big

Tax time is upon us! Normally, there’s little to celebrate about this time of year, except maybe that we’ll get two extra days to have our taxes postmarked (taxes are due April 17th because the 15th falls on a Sunday, and the following Monday is a Holiday in the District of Columbia). But here’s something to celebrate: the “5 Neglected Tax Deductions that Can Save You Big.” For eligible tax payers, these deductions just may come as a welcome surprise.

1. Don’t Ignore Health Savings Account Contributions

If you pay for a high-deductible Health Insurance policy, chances are you or your employer set up a healthcare Flexible Spending Account (FSA) or Health Savings Account (HSA) that you make regular contributions to. These plans are great because all contributions are considered adjustments to income, and therefore are above-the-line tax deductions. The maximum tax-deductible contribution for 2011 was $3,050 for individual plans, and $6,150 for family plans (with a $1,000 limit for catch-up contributions). You may report your tax-deductible HSA contributions on IRS Form 8889 (here are the instructions), and total contributions on Form 1040. Note that Insurance companies report your FSA/HSA contributions to the IRS using Form 5498-SA.

2. Deduct those Business-Related Vehicle Expenses

While you cannot deduct the costs of commuting between your home and work, because these are considered “personal commuting expenses” by the IRS, you can deduct the cost of other types of business-related car transportation. Specifically, if you used your car to meet clients, traveled between places of work or to a temporary work location, you may qualify. There are two basic methods of claiming expenses:

• The Actual Expense method allows you to deduct all of your actual vehicular business-related expenses for 2011.

• The Standard Mileage Rate method, which is used instead of actual expenses, reflects the average cost of operating a vehicle. For 2011, the standard mileage rate is: 51 cents/mile (from January 1 through June 30, 2011), and 55½ cents/mile (from July 1 through December 31, 2011).

As a rule, if you use a newer car for business, the Actual Expense option will typically provide a larger deduction, as you’re allowed to deduct actual expenses like depreciation, lease payments, etc. Remember, anytime you use your vehicle for both work and personal driving, you can only deduct the actual work expenses; keeping records of your business-related car costs is a must, regardless of which option you select. The rules covering this deduction can be complex, so consider consulting a tax professional for further information.

3. If You Started a Business, Deduct the Start-Up Costs

Did you start a business in 2011? Most people focus business-related tax deductions on businesses that are already established, and have at least 3-5 years of profitability. But what about deductions for people who are just getting their businesses off the ground? If this sounds like your situation, you too can deduct some of your business start-up costs. The costs of starting a business, before you actually begin business operations, are called capital expenses. These costs include things like expenses for setting up an office, travel, marketing, etc. Some people wrongly assume you cannot deduct capital expenses; you can, but the catch is that you have to amortize a good deal your start-up costs. For 2011, you may deduct up to $5,000 in capital start-up expenses (any remaining costs over $5,000 must be amortized and spread out over subsequent years). But if you started an in-home business, chances are the $5,000 may be quite suitable.

4. Job Hunting Expenses

The IRS has an entire webpage devoted to tax tips and links designed to assist unemployed individuals (see more here). This includes information on how to deduct job search related expenses on your 2011 taxes. Yes, if you were unemployed or looking for a new job, you may be able to deduct part of the costs you incurred (see Form 1040 Schedule A instructions). But, of course, there are some important rules that establish deduction eligibility.

First, the expenses must be spent on a job search in your current occupation; new occupation job search expenses are not deductible. Second, you may deduct employment and outplacement agency fees you pay while looking for a job, but again, only if you’re looking for jobs in your present occupation. Third, you may deduct costs incurred while preparing and mailing copies of your résumé to prospective employers. Fourth, you may be able to deduct travel expenses incurred when traveling to a new area, but only if the trip is primarily to look for a new job. And fifth, in order to claim this deduction, your job search costs must be above 2% of your adjust gross income (AGI).

Be aware that the IRS does not allow job search related deductions if a substantial amount of time elapsed between your previous job and when you began looking for work. Also, the job search deduction does not apply to first-time job seekers. Finally, if you received unemployment benefits, or received money from other sources, the IRS may count this as income that needs to be reported.

5. State Income Taxes vs. Sales Taxes

In most states, you’re required to deduct either state and local income taxes, or state and local sales taxes. Opting for the income tax deduction tends to be larger for most people because it’s greater than sales tax in many areas. However, don’t be deluded into automatically going the state-income-tax-route. If you purchased an expensive item, like a vehicle, or other big-ticket item, this should be included in your sales tax calculation. For plenty of people, opting to deduct based on sales tax means more money back than going with income taxes. View the sales tax calculator on the IRS website to help you determine which deduction is more beneficial for you.

And here’s a useful tax tip for your 2012 taxes, to do today….File a new W-4 with your employer as soon as possible. Here’s why: Payroll withholding is a fact of life, and a W-4 form determines how much of each paycheck goes to the government. For most of us, the amount we get in our paycheck is not the amount that is actually most advantageous to us. How is that? When you receive a tax refund in April, it means the government took too much out of each paycheck. Most of us wish we could have had some of that money during the year, when we needed it. Likewise, if you owe the IRS money in April, it means the government took too little out of each paycheck. No one wants to give all that back in one large check on April 15th. Filing a new W-4 lets you recalculate how much the government should be taking from each check. For example, if you expect a refund, adjusting your W-4 means more money in each paycheck. And if you expect to owe taxes, adjusting your W-4 means less money in each paycheck, but also less stress come tax time.

When should you file a new W-4? Again, do it now. First, because Congress just passed a tax-extender bill resulting in reduced social security taxes that could save you 2% on your paycheck (it may not seem like much, but why let even one extra cent slip away?). And second, if you’ve experienced the birth of a new baby, added a Mortgage, or got divorced after you filed your last W-4, you should adjust your tax withholding now, and spread those tax savings throughout the year.

by Mark Curtis and Michelle Walker

Published 1/26/12 15:41

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