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11 Most Overlooked Tax Deductions

The most recent numbers from 2007 show that nearly 51 million people itemized deductions claiming more than $1.33 trillion worth of deductions. Another 91 million taxpayers only claimed the standard deduction. Some of those who took the easy way out probably shortchanged themselves. (If you turned 65 in 2009, remember that you deserve a bigger standard deduction than younger folks.)

1. State sales taxes

This write-off makes sense primarily for those who live in states that do not impose an income tax. You must choose between deducting state and local income taxes, or state and local sales taxes. For most citizens of income-tax states, the income tax deduction usually is a better deal. IRS has tables for residents of states with sales taxes showing how much they can deduct. But the tables aren't the last word.

If you purchased a vehicle, boat or airplane, you get to add the state sales tax you paid to the amount shown in IRS tables for your state, to the extent the sales tax rate you paid doesn't exceed the state's general sales tax rate. The same goes for home building materials you purchased. These items are easy to overlook. The IRS even has a calculator on its Web site to help you figure out the deduction, which varies by your state and income level.

The American Recovery and Reinvestment Act permits taxpayers to take a deduction for state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. The deduction is available on new vehicles purchased from Feb. 17, 2009, through Dec. 31, 2009. In states that don't have a sales tax, the law provides a deduction for other taxes or fees paid. This deduction is available whether or not a taxpayer itemizes deductions on Schedule A.

The deduction is limited to the taxes and fees paid on up to $49,500 of the purchase price of an eligible vehicle. The deduction is reduced for joint filers with modified adjusted gross incomes (MAGI) between $250,000 and $260,000 and other taxpayers with MAGI between $125,000 and $135,000. Taxpayers with higher incomes do not qualify.

Taxpayers who make qualifying new vehicle purchases this year can estimate the deduction with the help of IRS Publication 919.

2. Reinvested dividends

This isn't really a deduction, but it is a subtraction that can save you a lot of money. And it's one that many taxpayers miss. If, like most investors, you have mutual fund dividends automatically invested in extra shares, remember that each reinvestment 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.

3. Out-of-pocket charitable contributions

It's hard to overlook the big charitable gifts you made during the year by check or payroll deduction. But the little things add up, too, and you can write off out-of-pocket costs you incur while doing good deeds. Ingredients for casseroles you regularly prepare for a nonprofit organization's soup kitchen, for example, or the cost of stamps you buy for your school's fundraiser count as a charitable contribution. If you drove your car for charity in 2009, remember to deduct 14 cents per mile.

4. Student loan interest paid by Mom and Dad

Until recently, if parents paid back a student loan incurred by their children, no one got a tax break. To get a deduction, the law held that you had to be both liable for the debt and actually pay it yourself. But now there's an exception. If Mom and Dad pay back the loan, the IRS treats it as though they gave the money to their child, who then paid the debt. So a child who's not claimed as a dependent can qualify to deduct up to $2,500 of student loan interest paid by Mom and Dad.

5. Moving expense to take first job

Here's an interesting dichotomy: Job-hunting expenses incurred while looking for your first job are not deductible, but moving expenses to get to that first job are. And you get this write-off even if you don't itemize. If you moved more than 50 miles, you can deduct 24 cents per mile of the cost of getting yourself and your household goods to the new area, (plus parking fees and tolls) for driving your own vehicle.

6. Property tax deduction for non-itemizers

If you don't itemize your deductions but paid property taxes, you qualify for an additional standard deduction of up to $500 (up to $1,000 if married filing jointly). While this benefit was initially good only for 2008, Congress extended it into 2009. There are no income limits to claim this extra deduction.You claim the deduction as an addition to your regular standard deduction on Form 1040 or Form 1040A.

7. Child care credit

A credit is so much better than a deduction - it reduces your tax bill dollar for dollar. So missing one is even more painful than missing a deduction that simply reduces the amount of income that's subject to tax.

But it's easy to overlook the child care credit if you pay your child care bills through a reimbursement account at work. Until a few years ago, the child care credit applied to no more than $4,800 of qualifying expenses. The law allows you to run up to $5,000 of such expenses through a tax-favored reimbursement account at work.

Now, however, up to $6,000 can qualify for the credit, but the old $5,000 limit still applies to reimbursement accounts. So if you run the maximum $5,000 through a plan at work but spend more for work-related child care, you can claim the credit on up to an extra $1,000. That would cut your tax bill by at least $200.

8. Earned Income Tax Credit

Millions of lower-income people miss out on this every year. In 2008, 24 million taxpayers used the Earned Income Tax Credit program to claim more than $48 billion, or an average of $2,000. However, 25% of taxpayers who are eligible for the earned income credit fail to claim it, according to the IRS. Some people miss out on the EITC because the rules can be complicated. Others simply aren't aware that they qualify.

The EITC is a refundable tax credit - not a deduction - ranging from $438 to $4,824. The credit is designed to supplement wages for low-to-moderate income workers. But the credit doesn't just apply to lower income people. Tens of millions of individuals and families previously classified as "middle class" - including many white-collar workers - are now considered "low income" because they lost a job, took a pay cut, or worked fewer hours last year.

The exact refund you receive depends on your income, marital status and family size. To get a refund from the EITC you must file a tax refund, even if you don't owe any taxes. Moreover, if you were eligible to claim the earned income tax credit in the past but didn't, you can file any time during the year to claim an EITC refund for up to three previous tax years.

Another feature is that you can get the credit sooner rather than later. If you expect to qualify for the credit in 2009 and you have at least one dependent child, you can request part of that credit immediately under the "Advance EITC Program." You must fill out a Form W-5, which will probably only take you a few minutes to complete.

9.State tax you paid last spring

Did you owe tax when you filed your 2008 state tax return in the spring of 2009? Then remember to include that amount with your state tax deduction on your 2009 return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments.

10. Refinancing points

When you buy a house, you get to deduct points paid to obtain your mortgage in one fell swoop. When you refinance a mortgage, however, you have to deduct the points over the life of the loan. That means you can deduct 1/30th of the points a year if it's a 30-year mortgage - that's $33 a year for each $1,000 of points you paid. Doesn't seem like much, but why throw it away?

Also, in the year you pay off the loan - because you sell the house or refinance again - you get to deduct all the points not yet deducted, unless you refinance with the same lender.

11. Jury pay paid to employer

Some employers continue to pay employees' full salary while they are doing their civic duty, but ask that they turn over their jury fees to the company coffers The only problem is that the IRS demands that you report those fees as taxable income. You have a right to deduct the amount so you aren't taxed on money that simply passes through your hands.