One time someone asked me, Is there something worse than paying taxes? And I answered “Paying more than you have to”.
Paying more tax than you have to is foolish. It does not provide you extra points with the government. If you missed tax deductions and overpaid in taxes in one year, you cannot underpay the following year. You have to file an amended tax return to claim the missed tax deductions, go through the microscope of the IRS, and potentially expose yourself to an audit to receive the money that was yours to begin with.
You can avoid all of this by taking advantage of tax organizers which helps you gather documents and serve as a reminder of commonly overlooked tax deductions. The best insurance against missed tax deductions is documentation and good records.
1. Points Paid on Home Refinancing
As a general rule, the points you paid to refinance your mortgage are deducted over the term of the new loan. Therefore, If you have a 30 year mortgage, the deduction for any points are spread out over 30 years. However, If you refinance your home to make substantial improvements you may be able to fully deduct the portion of points related to the improvements in the year you refinance.
Your new 30 year mortgage is for $200,000 and you paid $3,000 in points. However, $40,000, or 20%, of the mortgage was to add a room. You can deduct 20% of your points, or $600 in the year you refinanced. The remaining $2,400 in points is divided by 30 years and deduct $80 each year.
Note: If you sold a home this year in which you had previously refinanced the loan and paid points, you can deduct this year all the previously undeducted points.
2. Sales Taxes on New Vehicles
If you bought a car, truck, or motor home last year you can deduct the sales taxes paid. There are maximums, of course, and income limitations that apply.
3. Single parents may file as head of household
If you are single at the end of the year and had a dependent child (or other dependent) living with you for at least half the year, you may qualify for lower tax rates by claiming “head of household” instead of “single.”
4. Claim parents as dependents
If you furnish more than half of the support of your parents, you may be entitled to claim them as dependents on your return. If you furnish less than one-half, but the combined support given by you and your siblings exceeds one-half, you may be able to arrange to designate one of you as eligible to claim the deduction.
5. Health insurance for self-employed
If you are self-employed, you can deduct the cost of medical, dental and long-term care insurance premiums that self-employed people pay for themselves, their spouse and their dependents. This is true even if the self-employed does not itemize deductions. Unlike an itemized deduction, this deduction treatment is beneficial because it lowers your adjusted gross income (AGI). Having lower AGI can reduce the odds that you’ll be affected by unfavorable phase-out rules that can cut back or eliminate various tax breaks.
You may be able to take this deduction if one of the following applies to you:
– You had a net profit from self-employment. You would report this on a Schedule C, Profit or Loss From Business, Schedule C-EZ, Net Profit From Business, or Schedule F, Profit or Loss From Farming.
– You had self-employment earnings as a partner reported to you on Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc.
– You used an optional method to figure your net earnings from self-employment on Schedule SE, Self-Employment Tax.
– You were paid wages reported on Form W-2, Wage and Tax Statement, as a shareholder who owns more than two percent of the outstanding stock of an S corporation.
The medical premiums deduction mentioned above is not a business deduction. It is a special personal deduction for the self-employed. This deduction applies only to your federal, state, and local income taxes, not to your self-employment taxes.