Save Tax Dollars Now!

by Roy A. Lewis, E.A. - March 3, 2006

There are a whole lot of lines on your tax return. Have you researched every last one, making sure you're taking advantage of all the legal ways you can cut your tax bill? Few people do, and even some tax professionals miss opportunities to reduce a taxpayer's tab.

Have no fear -- the Fool is here, giving you the scoop on the most overlooked tax credits and deductions. Drumroll, please!

Educator expenses
If you're a teacher or school administrator, you just might qualify for a deduction that will allow you to reduce your taxable income. According to a recent study by the National Education Association, the average K-12 teacher spends approximately $400 annually out of pocket for classroom supplies. In the past, many teachers would take those expenses as deductions on their tax returns, under "miscellaneous itemized deductions." But most teachers saw no benefit, since only those miscellaneous itemized deductions that exceed 2% of adjusted gross income (AGI) will actually reduce taxable income.

However, there is a $250 "above the line" deduction for qualified supplies available to certain teachers and administrators. Check out line 23 on Form 1040 or line 16 of Form 1040A. You don't have to itemize your deductions to claim this deduction, and there are no income limitations.

Retirement savings contribution credit
If you make a contribution to virtually any retirement account (such as an IRA, 401(k), 403(b), or 457), you may be eligible for this credit. You really have to dig for this one, since most people won't even look at the retirement contribution information reported on their W-2 forms. Even if you use a computer program -- such as Intuit's (Nasdaq: INTU) TurboTax -- to complete your return, it's possible to overlook reporting your 401(k) contributions. This credit is limited to the lower level of the income spectrum, but if you qualify, it's a wonderful (and relatively easy) way to cut your taxes. Check out line 51 of Form 1040 or line 32 of Form 1040A.

Don't forget: You still have until April 17, 2006, to make a 2005 contribution to your IRA.

Self-employed health insurance
If you're self-employed and pay qualified health-insurance premiums, you will find a nice surprise on Form 1040, line 29. For 2005, you may be eligible to deduct 100% of your qualified health-insurance premiums. Review the instructions for this deduction, since it can get a bit tricky. But if you qualify, you'll save a bunch of money compared to taking these expenses as a medical deduction on your itemized deduction schedule.

Student loan interest deduction
This is another way to reduce your taxes without having to itemize your deductions. As you may know, most interest paid for personal expenses is no longer deductible. But Congress has carved out an exception for student loan interest, and you don't have to use Schedule A in order to claim this little gem. There are income limitations, and if your student loans are large, it's possible you won't receive a deduction for all of the interest you paid. But for the majority of taxpayers, this is an overlooked way to lower your tax bill. Check out line 33 on Form 1040 or line 18 on Form 1040A.

Loan points
Did you overlook the deduction for the points that you paid on that new loan? Many people do. Generally, the points that you pay for a loan on a new purchase are immediately deductible, while those paid to refinance an existing loan must be deducted on an amortized basis over the life of the loan. But if the balance of that loan is repaid all at once (by selling the home in question or refinancing again), the unamortized portion of the loan points can be immediately deducted.

Tuition and fees deduction
Education credits aren't the only ways to shave a few dollars off your tax liability. If you're taking qualified college courses, it's possible that you can claim a deduction for these expenses. While there are income limitations, it's another "above the line" deduction; you can claim it even if you don't itemize your deductions on Schedule A. Check out line 19 on Form 1040A or line 34 on Form 1040.

Worthless stock
How about those shares of stock that you bought with high hopes, only to see the down payment on your dreams crash and burn? Many taxpayers still aren't aware that a deduction is allowed for those worthless shares. Even if your stubs aren't technically worthless, selling them to a non-related friend or family member (such as an in-law) will allow for the deduction in the year of sale.

Credit card payments
Did you buy your business computer near the end of the year and charge it? Did you use your credit card to donate to your favorite charity during the holidays? You might think that you have to wait until you pay that credit card bill before you can take the deduction, but that's not the case. The IRS treats a credit card charge like any other loan, so you receive the deduction in the year that the charge was made, not in the year that the credit card bill was paid.

Charitable and medical travel
Do you use your auto for charitable purposes? If so, you can deduct 14 cents per mile for all qualified charitable travel. In addition, you can deduct your out-of-pocket expenses when you are serving a qualified organization. For example, Scout leaders can deduct the cost of uniforms. Additionally, you can also deduct a higher mileage rate (29 or 34 cents per mile) if you worked directly with the Hurricane Katrina relief efforts. Keep in mind, however, that you can't deduct the value of any time you donate to a charitable cause.

You probably also use your personal vehicle for medical travel -- to and from your doctor and dentist visits, for example. For 2005, the medical travel deduction is 15 cents per mile through Aug. 31, and 22 cents per mile for the remainder of the year. If you have to travel a great distance for medical treatment, the actual cost of the travel, including airfare and lodging, can also be deductible.

It's not too late
Did you miss any of these deductions? Hopefully not. But if you did, you can always file an amended tax return to recoup your overpaid taxes.