Tax Season: Credits, Deductions, Tips, and Everything Else You Need to Know

February 4, 2014

Tax season is officially here – and for many, that equates to one big headache. Luckily we’ve compiled an extensive list of tips and tricks for making filing a breeze.

Getting Started and Things to Remember

Your filing status is determined on December 31, 2013. If you got married or divorced in 2013, it only matters what your status was as of the last day of the year. If you are legally separated but not yet divorced, you are able to file as “Single” or “Head of Household” depending on your dependents.

Don’t panic if you can’t pay. If you are having financial difficulty and don’t think you will be able to pay your tax bill come April, stay calm. Pay as much as you can before the April 15 deadline to avoid penalties and interest. More than 75 percent of taxpayers are eligible for an Installment Agreement. It is never too early to contact the IRS to discuss payment options if you know you won’t be able to pay in full by the April 15 deadline.

Remember Number 17. IRS Publication 17 that is. If you have any questions about your taxes, then refer to this comprehensive guide, found online here.

Credits and Deductions You Don’t Want to Miss

Did you know that about 45 million of us itemize on our tax returns – claiming more than $1 trillion in deductions each year? Even if you don’t itemize, there are a few credits and deductions that you are still eligible for.

Believe it or not, a lot of people simply overlook certain deductions and credits leaving real dollars on the table. Although it is always best to consult with a tax professional about your specific situation, here is a list of tax credits and deductions you might be eligible for.

#1 – Child and dependent care credit. This is a credit (even better than a deduction), and is often overlooked. If you have kids younger than 13, you may be eligible to take a credit for the costs paid to childcare providers and other kids’ programs (such as before and after school care and day camps). If you are married, then you and your spouse must both work full-time (or one of you must be a student or disabled). You can claim a credit of up to $3,000 for one child or up to $6,000 for multiple children. You can also claim the credit for dependent adults who live with you and cannot physically care for themselves. The IRS has a comprehensive explanation available here.

#2 – Cost of moving for your job. With the tight economy, many people have been forced to relocate for jobs. The good news is that you may be eligible to deduct the reasonable expenses associated with moving – AND you don’t have to itemize to qualify for this deduction. Your move must be closely related in time and in place to the start of work at your new location. (Generally, this means you can consider moving expenses incurred within one year from the date you started work at the new location.) To deduct, you must satisfy 2 tests: 1) Your new workplace must be at least 50 miles farther from your old home than your old job location was (or if this is your first job, then your new job location must be at least 50 miles away from your old home); 2) As an employee, you must work full-time for at least 39 weeks during the first 12 months immediately following your arrival in your new job location. For more information, check out the IRS website.

#3 – Job search expenses. If you incurred costs looking for your first job or for a job in a new occupation, then unfortunately this deduction doesn’t apply to you. But if you incurred costs looking for a new job in your present occupation, they may be deductible, even if you do not get a new job. Deductible expenses include career counseling, employment and outplacement agency fees, amounts spent preparing and mailing your resume to prospective employers, and travel/transportation expenses. There is one catch – these costs must exceed 2% of your adjusted gross income (AGI) for the year. For more information click here.

#4 – Student loan interest (even if your parents help you pay your loans). You do not need to itemize in order to claim this deduction. Generally, the amount you can deduct is limited to the lesser of $2,500 or the amount of interest you actually paid. The loan must be a “qualified student loan,” meaning you took it out solely to pay higher education expenses. The right to claim this deduction goes to the person who is legally obligated to pay the interest – even if that is not the person who is actually paying it. So if your parents are helping you repay your loans, and you are the one who is legally obligated to pay, then you get to claim the deduction. For more information click here.

#5 – Charitable contributions. You can deduct contributions that you made to qualified organizations in 2013. You should have a good record of both monetary and noncash property that was donated so that you can support the deductions taken. For more information, the IRS has prepared this helpful summary.

#6 – State and local taxes (deductible on your federal return). This deduction includes income taxes, real estate taxes, and personal property taxes. The most overlooked deduction here relates to personal property taxes – those pesky taxes you pay each year to renew your car or boat registration are deductible from your federal taxes. Refer to this page for more information.

#7 – Home mortgages (including refinances). Most of us already know that interest paid on your home mortgage is deductible. But if you bought your home (or refinanced this year) and paid “points,” you may be eligible to deduct those points. If the points were paid for the purchase of a new home, then they can generally be fully deducted in the year that you purchased your home. Points paid for refinance are deductible over the life of the loan in most circumstances. For more information click here.

#8 – Medical and dental expenses. If you, your spouse, or your dependents have had significant medical or dental expenses this year, then keep this deduction in mind. In order to qualify, your medical expenses must exceed 10% of your adjusted gross income (AGI), or 7.5% of your AGI if you or your spouse is age 65 or older, and you can only deduct the amount in excess of that threshold. Deductible expenses don’t just include fees paid to doctors, dentists, hospitals, and pharmacies – you can also deduct payments for transportation to medical care as well as insurance premiums paid for policies that cover medical care or qualified long-term care. For more information click here.

#9 - Educator Expense Deduction. This deduction permits eligible educators to deduct up to $250 of unreimbursed, qualified expenses.   This deduction can be claimed on line 23 of IRS Form 1040 or line 16 of IRS Form 1040A.  Ask your tax professional for more information, or see IRS Publication 529, Miscellaneous Deductions, and IRS Publication 17, Your Federal Income Tax for Individuals.

Last Minute Tax Tips:

April 15, 2014 is the deadline for individuals. But what does that really mean?

If you are mailing your return, it means that your taxes must be postmarked before midnight on April 15, 2014. You really don’t want to end up standing in line at the post office on the eve of the deadline, so another option is to EFile your return on the IRS website.

The IRS imposes two different penalties for missing the deadline: A failure-to-file penalty (if you do not file by the deadline) and a failure-to-pay penalty (if you do not pay by the deadline, even if you file the return itself). The penalty for late filing is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. The failure-to-pay penalty is normally 1/2 of 1% of your unpaid taxes. If you have both penalties in the same month, the IRS caps the maximum penalty for both at 5%.

If you cannot file by April 15, file for an extension to avoid late penalties. However, it is important to note that you still must pay at least 90 percent of your tax by the original due date of April 15, or you will still be subject to the late penalty.

Beware of scams. Every year the IRS has releases their annual “Dirty Dozen” list of common tax scams. (Here are the Dirty Dozen from 2013.) Although these scams happen year-round, they often peak during the tax season. Remember: If it sounds too good to be true, it probably is.

Check the status of your refund. If you are lucky enough to be getting a refund instead of paying, you can check the status of your refund on the IRS’s “Where’s My Refund” website. The IRS tries to issue refunds within 21 days of receiving your tax filing.

Use Free File. If your income was $58,000 or less, you qualify to use brand-name tax software on the IRS website. Regardless of income, you can use the IRS online Fillable Forms, which are an electronic version of the IRS paper forms. The Fillable Forms are a good option for people who are comfortable preparing their tax returns without the use of tax software.

For more tax time tips visit the IRS website and read about their top 10 tax time tips.