As tax-time comes around again, many people are left wondering: Where are all the middle-class tax breaks? When it comes to taxation of wages -- ordinary income -- there are few places to hide. And that's painfully apparent this time of year, when people finally sit down to do their taxes.
The largest and most obvious personal income tax deductions come from mortgage interest, retirement plan contributions, charitable contributions... and having children! (In 2014, each child or "dependent" is worth an exemption of $3,950 right off the top of your income -- although that benefit may not come near the cost of raising the child.) To find some of the less obvious deductions, you have to do a little digging.
That's one reason that popular tax programs such as TurboTax, H&R Block, TaxACT and TaxCut have become so popular. It's not just the ease of filing online, or even the certainty that your math errors will be corrected. These programs literally walk you through the deduction maze -- asking questions that can reveal opportunities to cut your taxes.
To get you started, here's a reminder of some potential tax saving opportunities. Be sure to check with a tax preparer, or use software, to understand the details and limitations of each tax break.
IRA Contribution: This is your only last-minute opportunity to save on taxes. You have until April 15 to open a tax-deductible IRA for last year, 2014 -- contributing up to $5,500 (or $6,500 if you're 50 or older) if you have earned income and are not covered by a retirement plan at work. If you are covered by a workplace plan, the deductibility of your IRA contribution phases out if you have modified adjusted gross income (MAGA) over $60,000 (or $96,000 on a joint return). Even non-working spouses can have a deductible IRA.
Education Deductions: Depending on your situation, there are a number of tax deductions and tax benefits around paying and borrowing for college. As much as $4,000 a year in tuition and fees can be deducted, based on income level -- even if you don't itemize your taxes.
Credits reduce your tax bill directly. The American opportunity credit is a tax credit of up to $2,500 per eligible student for all four years of a college education. And the lifetime learning credit is 20 percent of the first $10,000 of eligible expenses to a maximum of $2,000 -- phasing out at incomes over $60,000 for single taxpayers. The catch is you can take only one of these deals in any year. IRS Publication 970: Tax Benefits for Education will be helpful in choosing which deal to take, and when.
If you paid interest on qualifying student loans, you can deduct up to $2,500 in interest paid, depending on your income. And even if parents actually pay the loan interest, a student who is no longer claimed as a dependent on the parents' return can deduct the interest on his or her return.
Charitable Contributions: Generosity is not its own reward; you must follow strict rules for valuing and validating charitable contributions. For contributions of either cash or goods worth more than $250, you must get a written receipt from the charity. As well, you should have an independent appraisal of the value for items over $500. If you are donating a car, boat or other vehicle, and the charity sells it, your ultimate deduction is limited to the value of the sale.
Medical Expenses: Medical expenses may be deductible, but only if they exceed 10 percent of your adjusted gross income. Until 2017, there is a special deal for seniors, who only have to exceed 7.5 percent of AGI to be able to deduct unreimbursed medical expenses.
If you pay medical expenses for another person, perhaps a child or aged parent, there are specific rules for when you may claim the expenses as a deduction. (See IRS Publication 502: Medical and Dental Expenses.)
Sales Tax, State Income Tax: You get a choice of deducting state income taxes paid OR sales taxes you paid -- a benefit for those who live in a state that does not tax income. In fact, the government has a table of what a typical consumer in each state pays in sales taxes, or itemize if you purchased big ticket items during the year.
Every year as I write a "tax column," updating opportunities and trying to make the point without including thousands of pages of IRS documents to explain, I wonder again why we don't have a simple flat tax, with a large exemption for lower income people, and a tax form that could fit on a postcard. That would save a lot of money -- for the government, and for us! And that's the Savage Truth.