Each year, the complexities of our tax code cause many taxpayers to leave money on the table when filing their returns. As they say, you must pay taxes but you don’t have to leave a tip.
Failing to take tax deductions you are entitled to can be costly, resulting in the loss of income that could have been applied toward other financial goals such as retirement planning, education funding or paying down debt. The commonly overlooked deductions noted below may help to minimize your tax liability this season.
Medical expenses: Differences between federal and state deductibility thresholds often lead taxpayers to overlook medical deductions. “When individuals think about itemized deductions they often don’t even consider the medical deduction — primarily because they have to exceed the Federal threshold limit of 7.5 percent to 10 percent (depending on income and age) of adjusted gross income, which usually means a catastrophic medical expense.
What they lose sight of is if they are a N.J. resident, medical expenses are deductible if they exceed 2 percent of N.J. adjusted income.” Remember, federal and state tax laws do not mirror one another and significant differences can exist. Also keep in mind that expenses for medical travel including parking, tolls and medical mileage may also be deductible.
Deductions for the care of children or an aging parent: Are you incurring expenses to care for a child or other dependent so that you and your spouse (if you are married) can work? If so, the commonly overlooked child and dependent care credit, which ranges from 20 to 35 percent of eligible expenses, may be available.
While the credit gradually declines for taxpayers depending on income, a minimum 20 percent credit is generally available for even higher income taxpayers. The credit is available if the care is provided to one or more qualifying persons who are defined by the IRS as being a dependent child age 12 or younger when the care was provided, or other individuals who are physically or mentally incapable of self care regardless of age.
Up to $3,000 in expenses for one qualifying individual or $6,000 for two or more qualifying individuals is considered in calculating the credit. Since a tax credit can be more valuable than a deduction, be sure to determine if you qualify. Consider reviewing IRS Publication 503, Child and Dependent Care Expenses for more information.
Energy saving home improvements: Up to 10 percent of the cost of certain energy saving property that you added to your primary home may qualify for a credit. This includes the cost of qualified insulation, windows, doors and roofs. This credit has a maximum lifetime limit of $500 and only $200 of this limit applies for window installations.
Unless extended again by Congress, the $500 credit will not be available for purchases made after 2013. For homeowners really going “green,” the Residential Energy Efficient Property Credit (available until 2016) of 30 percent is available to help offset the cost of alternative energy equipment that you installed on or in your home. Qualified equipment includes solar hot water heaters, solar electric equipment and wind turbines. This credit is available through 2016.