Overlooked Tax Breaks For Individuals

Close up of a 1040 tax documentWith so many possible deductions and credits available to the individual taxpayer it’s no surprise that the possibilities can get easily lost in the shuffle.

This article identifies some of the tax breaks that frequently get overlooked by the individual taxpayer. The points below will help reduce the confusion of what can and cannot be deducted in your 2016 tax returns.

Kiplinger has identified 23 of the most overlooked tax deductions. Included in these 23 are the following key highlights:

  • Reinvested Dividends: this is the one that former IRS commissioner Fred Goldberg told Kiplinger millions of taxpayers miss, costing them millions in overpaid taxes. If, like most investors, you have mutual fund dividends automatically reinvested to buy extra shares, remember that each new purchase 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.
  • Out-of-Pocket Charitable Contributions: It's hard to overlook the big charitable gifts you made during the year. But little things add up, too, and you can write off out-of-pocket costs incurred while doing work for a charity. 
  • Student Loan Interest Paid By Mom and Dad: If parents pay back a child's student loans, the IRS treats the transactions as if the money were given to the child, who then paid the debt. So as long as the child is no longer claimed as a dependent, he or she can deduct up to $2,500 of student-loan interest paid by Mom and Dad each year.
  • Estate Tax on Income in Respect of a Decedent: This sounds complicated, but it can save you a lot of money if you inherited an IRA from someone whose estate was big enough to be subject to the federal estate tax. Basically, you get an income-tax deduction for the amount of estate tax paid on the IRA assets you received. 
  • Refinancing Points: When you buy a house, you get to deduct in one fell swoop the points paid to get your mortgage. When you refinance, though, you have to deduct the points on the new loan over the life of that loan. In the year you pay off the loan—because you sell the house or refinance again—you get to deduct all as-yet-undeducted points. There is an exception to this rule if you refinance a refinanced loan with the same lender.
  • American Opportunity Credit: If the credit exceeds your tax, it can trigger a refund. 
  • Don’t Unnecessarily Report a State Tax Refund: The refund is taxable (reportable) only to the extent that your deduction of state income taxes the previous year actually saved you money. 

The bullet points above are some of the frequently over-looked deductions and credits identified by Kiplinger. However, for even more helpful resources, see GoBankingRates for a list of “50 Tax Write-Offs You Don’t Know About.”

At this point, you should be asking yourself whether you are getting all the deductions and credits you are entitled to. Of course, this is an analysis that should be done in conjunction with an experienced tax professional otherwise you might be leaving “money on the table.”

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