This article, written by Lisa Hay, originally appeared on Betterment.
Most taxpayers can use a standard deduction when filing their taxes, but you can possibly save more money if you're eligible for a variety of itemized deductions or credits.
While deductions and credits can save you money when you file, they're not necessarily created equal; a tax deduction lowers your taxable income, while a credit reduces the taxes you owe.
If you're not sure whether you should filed itemized deductions or take the standard deduction, consult with a tax professional. This article should not be considered tax advice. (Read the IRS guidelines for more information about the difference between standard and itemized deductions.)
To understand the difference between a deduction and a credit, think of it this way: In the 25 percent tax bracket, each dollar of a deduction is worth a quarter, but each dollar of a credit is worth a dollar.
Regardless of their differences, overlooked tax deductions and credits can cost you money. See if any of these apply to your 2014 income tax return.
1. State Sales Taxes
The sales tax deduction is usually most beneficial to those who live in states that do not impose a state income tax.1 You must choose between deducting state income taxes or sales taxes, and you should choose whichever provides the largest deduction.
However, sometimes even those who pay state income taxes will save more with the sales tax choice, especially in New Hampshire or Tennessee, where wage income is not taxed. The IRS provides a calculator that shows how much residents of each state can deduct, based on income, number of exemptions and state and local sales tax rates.
If 2014 was the year you purchased a vehicle, boat or airplane, you can add the sales tax you paid on that high dollar item to the amount shown in the IRS table for your state.
2. Points for Refinancing
Quick refresher on points: Also known as discount points, these are the fees you pay directly to the lender at closing in exchange for a reduced interest rate.
When you buy a house, you get to deduct the points paid to get your mortgage. Rules for refinancing, however, are different; when you refinance, you have to prorate the points and deduct them over the life of that loan. You get to deduct any points (that haven't been deducted already) in the year you pay off a refinancing loan -- whether you sell the house or refinance again.
3. Job Search Expenses
If you were looking for a position in the same line of work as your current or most recent job -- job-hunting expenses incurred while looking for your first job don't qualify -- you can deduct job search costs as miscellaneous expenses. Qualifying expenses can be written off even if you don't find a new job. Some expenses you can deduct are resume preparation and mailing, costs for placing ads and travel for out-of-town job-hunting trips.
Note that expenses can be deducted only if you itemize and to the extent that your total miscellaneous expenses exceed 2 percent of your adjusted gross income.
4. Legal Fees Related to Alimony
Although legal fees in a divorce are generally nondeductible, any lawyer fees that you incur while settling alimony are tax deductible.
You must itemize to get the deduction, and only those expenses that exceed 2 percent of your adjusted gross income are deductible. Make sure to ask your attorney to provide an itemized statement of fees so you can determine how much may qualify for a deduction.
5. Child Care Credit
You may qualify for a tax credit worth 20 percent to 35 percent of what you pay for child care while you work. Plus, if your employer offers a child care reimbursement account -- which allows you to pay for the child care with pre-tax dollars -- that may result in even greater bottom-line savings. For example, if you qualify for a 20 percent credit but are in the 25 percent tax bracket, the reimbursement plan would result in more money saved.
Expenses paid through an employer's reimbursement plan can't also be used for the tax credit. However, you may be eligible for both. (Read the IRS guidelines on the child care credit.)
For example, although only $5,000 in expenses can be paid through a tax-favored reimbursement account, up to $6,000 can qualify for the credit (for the care of two or more children; $3,000 for one child). So if you use the maximum of $5,000 through your reimbursement plan at work but spend even more than that for work-related child care (for two or more children), you may be able to claim the credit on as much as $1,000 of additional expenses.
6. American Opportunity Credit
This tax credit is good for the first four years of college. It is based on 100 percent of the first $2,000 spent on qualifying college expenses, and 25 percent of the next $2,000 for a maximum annual credit of $2,500 per student.
The credit is phased out for taxpayers with incomes above certain levels: modified adjusted gross income of $80,000 for individuals and $160,000 for married couples filing a joint return.
7. Credit for Lifetime Learners
The Lifetime Learning credit can be claimed for any number of years.
It is worth up to $2,000 a year, based on 20 percent of up to $10,000 you spend for post-high school courses that lead to new or improved job skills. Courses taken at a vocational school or community college can count.
The credit is phased out as income rises from $54,000 to $64,000 on an individual return and from $108,000 to $128,000 for couples filing jointly.
8. Credits for Alternative Energy Equipment Home Improvements
There's no longer a tax credit for installing storm windows and insulation. However, there is still a credit for installing qualified residential alternative energy equipment on your primary residence, such as geothermal heat pumps, wind turbines and solar hot water heaters. Your credit could be 30 percent of the total cost (including labor) of such systems installed through 2016.
9. Reinvested Dividends
This isn't a tax deduction or credit, but it can result in significant savings if you have mutual fund dividends automatically reinvested and used to buy additional shares.
Reinvested dividends should be added to your tax basis, which will reduce the taxable capital gain (or increase the loss) when you redeem the shares.
Forgetting to include reinvested dividends in your basis results in paying taxes twice on dividends -- once in the year when they were paid out and reinvested, and later when they're included in the proceeds of the sale. Note that Betterment automatically reinvests dividends and tracks basis for customers.
10. Local Exemptions for Municipal Bonds
If you held municipal bond ETFs or mutual funds, a portion of the dividends paid by municipal bond funds may be exempt from state and local tax. The applicable rules for exemption vary by state -- consult your tax advisor.
1 The seven states that do not have state income tax in 2015 are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
The content on this post is not intended to provide tax, legal, accounting, financial or professional advice, and readers are advised to seek out qualified professionals that provide advice on these issues for specific client circumstances. In addition, the publisher/blogger cannot guarantee that the information on this website/post has not been outdated or otherwise rendered incorrect by subsequent new research, legislation or other changes in law or binding guidance. The publisher/blogger shall not have any liability or responsibility to any individual or entity with respect to losses or damages caused or alleged to be caused, directly or indirectly, by the information contained on this website/post.More from Betterment:
- Should You File Now or on April 15?
- What Married Taxpayers Lose by Filing Separately
- Your 2015 Tax Calendar
Betterment is the largest, fastest-growing automated investing service, helping people to better manage, protect, and grow their wealth through smarter technology. With more than 70,000 customers and over $1.5 billion in assets under management, the service offers a globally diversified portfolio of ETFs, designed to help provide you with the best possible expected returns for retirement planning, building wealth, and other savings goals. Betterment is a CNBC Disruptor 50 and Webby award winner and has been featured in the New York Times, Forbes, and the Wall Street Journal. Betterment helps people to achieve a smarter financial future with minimal effort and at a fraction of the cost of traditional financial services. Learn more here.