“Secret” Tax Breaks

The last few years have seen a flurry of new tax laws, incentives and credits, some of which have largely gone unnoticed by even the most seasoned tax professionals. Probably the most publicized in the last few weeks has been the Adoption Credit, which netted Richard and Sacora Jefferson of Oklahoma City $54,000 when they received $13,170 in credits for each of the five children they adopted in the last few years.

The extended tax credits for startup companies and the new “backdoor” Roth IRA have been among the most frequently discussed at Bradley & Company, but there are several others that we feel justify noting.

Paying down the national debt

If you write a check to the federal government to help decrease the national debt, it counts as a deductible charitable contribution for that year’s federal return.

Hosting an exchange student

Do you have a student living with you under a formal agreement with a qualified organization that exists to provide educational opportunities for that student? Is that student a full-time student at a U.S. high school or secondary school? Is he or she not your dependent or relative? If you host an exchange student, all of this may apply. If it does apply, you are eligible for a tax credit of $50 for each month that the student lives with you (15 or more days of a month count as a full month).

Personal expenses related to volunteering

Volunteer work in itself will not provide you with a tax break, but you may be able to deduct 14¢ per mile on your 2011 federal return for charity-related mileage or the cost of the gas you paid for your driving on behalf of the charity, whichever is greater. You can also deduct the costs of tolls and parking related to your driving. Away from the driver’s seat, you can also characterize the out-of-pocket expenses you pay on behalf of a charity or qualified non-profit organization as charitable deductions (if the organization hasn’t reimbursed you for them). Buying equipment for the charity, buying office supplies or stamps, buying and cleaning uniforms – these are just some of the expenses that are deductible.

Travel expenses related to medical care

IRS Publication 502 states that you may deduct 16.5¢ per mile on trips you take to obtain medical care for yourself or your dependents. The trip has to be “primarily for, and essential to, medical care”. Bus, taxi, plane and train fares and ambulance service fees all count as expenses toward the deduction as long as the travel was for medical care. Parents transporting children who need medical care and nurses traveling with a patient can also claim the deduction. Also, some who qualify for this deduction may also get a tax break of up to $50 per night for lodging related to trips taken for health care.2

Local & state income taxes

Did you buy a house, an RV or a boat in 2010? You may be able to exploit state or local income tax deductions. Only 7 states don’t have state income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming). Tennessee and New Hampshire merely tax forms of dividends and interest.

Private mortgage insurance

This deduction is still around – it is scheduled to sunset at the end of 2011. Assuming you bought your home with less than 20% down, you probably have PMI – and you can deduct the premiums you paid in 2010 on your 2010 return. To get the break, your home loan must have been originated after 2006. If you refinanced your home after 2006, you are allowed to deduct PMI for that mortgage. However, phase-outs kick when your adjusted gross income exceeds $100,000 ($50,000 for those married and filing separately).

Health insurance premiums

In 2010, did you spend in excess of 7.5% of your AGI on healthcare and other medical-related expenses? You can then deduct the amount you spent (but to do this properly, the expenditures should be itemized). You can’t deduct pre-tax insurance premiums.

Safe deposit box rental

In certain cases, you can deduct this cost. The IRS says you can if you rent the safe deposit box to store taxable income-producing stocks, bonds or investment-related papers and documents. If you store tax-exempt securities, jewelry or other personal items in the box, you can’t exploit the deduction.     

Tax preparation costs

The IRS commonly lets you deduct the fees you paid to such professionals. The cost of tax preparation software and tax publications counts toward the deduction, and so do e-filing fees.