Personal Finance > Taxes

Most overlooked deductions
To minimize the hard-earned dollars you pay on April 15, don't forget about these breaks.
April 9, 2004: 2:56 PM EDT
By Jeanne Sahadi, CNN/Money senior staff writer

NEW YORK (CNN/Money) Even if you don't itemize deductions on your federal tax return, make sure you don't cheat yourself out of tax breaks to which you're legally entitled.

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CNN/Money asked two tax experts -- enrolled agent David Mellem of Ashwaubenon Tax Professionals in Green Bay, Wis., and Jackie Perlman, senior tax research analyst of H&R Block to identify those deductions and credits that taxpayers most often overlook or are most likely to overlook this year because they're not aware of changes to the tax law. Here's their list:

Tuition credits and deductions

If you've been shelling out big bucks to a college or university, you might be able to get some of them back. There are two education credits or a tuition deduction for which you may be eligible.

(Remember, a credit reduces the taxes you owe dollar for dollar. A deduction reduces the taxes you owe by a percent of every dollar you're allowed to deduct. A $100 credit reduces your taxes by $100. A $100 deduction reduces your taxes by $100 times your tax bracket. So if you're in the 25 percent bracket, your $100 deduction will reduce what you owe by $25 ($100 X 0.25)).

The Hope Scholarship Credit is for taxpayers whose dependents (or who themselves) are in their freshman or sophomore years in college.

For the 2003 tax year, if you're married filing jointly and your modified AGI is less than $103,000 ($50,000 if you're unmarried), you may take a credit for up to $1,000 of the first $1,000 you pay in qualified tuition expenses and up to $500 of the second $1,000 you pay, for a maximum of $1,500 per eligible student. So if you spent $1,200 on tuition costs, you can take a credit of $1,100 (100 percent of the first $1,000 back, plus 50 percent of the remaining $200).

The amount you may claim, however, begins to be reduced if your AGI is over $83,000 ($40,000 if unmarried).

For more information, click here.

With the Lifetime Learning Credit, you may get a credit for up to 20 percent of the first $10,000 in tuition you pay, for a maximum credit of $2,000. That's an increase over the $5,000 cap on educational expenses in 2002.

There are a few limitations, however. First, only one Lifetime credit is allowed per tax return, so you may only apply it for one of your dependents (or you or your spouse if one of you is the student). Second, you can't take the Lifetime credit in the same year as the Hope credit for the same student. And third, to qualify, your modified AGI must be below $100,000 if you're married filing jointly ($50,000 if single).

The amount you may claim, however, begins to be reduced if your AGI is over $80,000 ($40,000 if unmarried). For more information, click here.

If your income is too high to qualify for either the Hope or Lifetime credits, you may be eligible to take a Tuition Deduction. If you're married filing jointly and your AGI is below $130,000 ($65,000 if you're single), you may be able to deduct up to $3,000 in qualified tuition expenses. The credit may only be taken for one person per return. For more information, click here.

Student loan interest

Assuming you met certain income requirements, it used to be that you could deduct the interest you pay on student loans up to a certain amount for the first 60 months (5 years) of your repayment period. Now that five-year limit has been lifted.

So, if your AGI is below $130,000 and you're married filing jointly ($65,000 if you're single), you may be able to deduct up to $2,500 in interest for as many years as it takes to repay the loan. But the amount you may deduct is reduced somewhat if your AGI is greater than $100,000 ($50,000 if you're single).

For more information, click here.

Moving expenses

If you moved in 2003 to take a new job or to follow your employer to a new locale, and you weren't reimbursed for your troubles, you may be able to deduct your moving expenses on your federal return.

There are, however, two tests you must meet: a distance test and a time test.

Your new office must be 50 miles farther from your old home than was your old office. In other words, if your commute used to be 20 miles, you need to show that your commute from the new office to your old home would have been at least 70 miles to justify the deduction of moving expenses.

You also need to work full-time for your employer for at least 39 weeks during the 12 months right after you move. Now, if you moved in December 2003, you can still deduct the move, but if you end up working less than the required time, you eventually must amend your 2003 return or report the amount deducted as income on your 2004 return.

The time test is slightly different for those who are self-employed. For more information, click here.

Dependent and child care costs

Say you're paying someone to take care of your elderly parent while you're at work or you've enrolled your kids in a daycare center. If you've signed up for a dependent care benefit at work, your employer may reimburse you with tax-free dollars for those expenses up to $5,000.

But if your expenses exceed the amount for which you're reimbursed, you may be able to take a credit for a percentage of the unreimbursed expenses on your federal tax return.

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Depending on your AGI, it used to be that you could take a credit of between 20 percent and 35 percent of unreimbursed expenses up to $2,400 for one dependent, and $4,800 for two or more. But those limits went up in 2003 to $3,000 and $6,000 respectively.

So say you have two kids, and you got $5,000 reimbursed in childcare expenses from your employer, but you spent $6,000 on daycare in 2003. If your AGI is over $43,000, you are now eligible to take a credit of $200, which is 20 percent of that extra $1,000 you spent. If your AGI is less than $43,000, you may be able to take up to 35 percent, or $350.

For more information, click here.  Top of page

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