I just read that as of Feb. 14th, people who itemize deductions on their tax returns are able to file them for 2010. I lost my job this year so I want to be really careful to make sure I don’t pay more taxes than I have to. Do you have any tips? MICHELLE, Chicago, IL
This is a great question that applies to a lot of people. In fact, 46 million people use itemized deductions, and they claim about $1 trillion. Roughly double use standard deductions, and they claim another $700 billion. With over 70,000 pages in the tax-code, it’s easy to get lost! However, it is important to pay attention because you can save a lot of money if you take the deductions you are entitled to.
Let’s start with the fact that Michelle said she lost her job this year. Michelle is certainly not alone. In fact, roughly 10 pwrcent of Americans were out of work in 2010. What most people don’t know is that you can deduct your job-hunting expenses, assuming your total miscellaneous itemized deductions are greater than 2 percent of your adjusted gross income. These expenses include everything from the cost of printing resumes to the cost of getting to and from interviews. The catch is that you must be looking for a job in the same field, and it cannot be your first job.
What about the people who were looking for their first job? Are they out of luck?
No, they aren’t. While they can’t get the deduction I just mentioned, there is another deduction that they shouldn’t miss. If you graduated in 2010 and moved somewhere to start your first job, you can get a deduction for that. If you moved at least 50 miles for your job, you can deduct your moving expenses. Moving expenses include many of the costs you paid out of pocket to move your household. For example, you can deduct the cost of renting a moving truck, highway tolls or parking costs you paid during the drive, and even 16.5 cents for every mile you drove. This is not a bad savings when you’re just starting out. Just don’t try and claim any speeding tickets!
So, there are deductions for people looking for jobs and deductions for people moving for jobs. What about people who are in school? Is there a tax deduction for that?
Yes, there is. However, it is a tax credit instead of a tax deduction. Let me first explain the difference between a deduction and a credit.
A tax credit actually reduces the amount of taxes you owe the government, dollar for dollar. A tax deduction decreases your taxable income. So, with a $1,000 credit, you will actually pay $1,000 less in taxes. However, with a deduction, if you pay 25 percent in taxes, a $1,000 deduction would shave $250 off your tax bill. It is also important to remember you can claim a tax credit even if you don’t itemize your deductions.
So, now that I’ve explained the difference between a tax deduction and a tax credit, it should make more sense when I say if you were a student in 2010, you should NOT miss this credit. It is called the American Opportunity Credit, and it allows up to $2,500 of college tuition and related expenses to be taken as a tax credit. You can claim this credit for all four years of school. Take advantage of this credit while you still can because it is set to expire in 2012.
Are there any other credits people often overlook that you want to mention?
I’m glad you asked. One of my favorite credits – and remember this is a credit and not a deduction – is for people that save. This credit is commonly known as the Saver’s Credit because the government actually rewards you for saving! More than 50 million households are eligible, but only about 6 million claim it each year because a lot of people don’t know about it.
Here’s how it works. If you contribute to a retirement account like a 401(k) or an IRA, you could be eligible for a $1,000 credit. If you are married, you could get a $2,000 credit. The only catch is that you cannot make over $27,750 a year if you are single. If you are married, you cannot make over $55,500 as a couple. Additionally, you must be over 18 years old; you cannot be a full-time student, and you cannot be claimed as a dependent on anyone else’s tax return.
To get more information on deductions, go to IRS.gov.