What You Can Deduct on Your Taxes this Year
It's getting down to the wire and your taxes are due soon. You don't want to miss out on important tax credits and deductions that can save you money. Sharon Epperson talks to Elda Di Re, a partner and tax leader at Ernst & Young, about retirement plan contributions, job-relaxed expenses, charitable donations and other tax moves that can help filers save money, even in the 11th hour. This article and video from CNBC.com gives you eight way you can deduct and save money on your taxes.
With time running out to file your 2013 tax return, you want to make sure you're on top of the available deductions to maximize your tax savings.
Taxpayers may be aware of numerous tax breaks, but depending on your income, many deductions may no longer be as valuable—or you may be ineligible entirely.
Due to recent tax-law changes, anyone with an adjusted gross income above $250,000—for a married couple filing jointly, it's $300,000—will face a limit on itemized deductions that could thus limit their potential tax savings for the 2013 tax year. In addition, many upper-middle-income taxpayers who face the Alternative Minimum Tax—a higher tax than their regular income tax—will not be able to claim deductions that may be allowed on a regular tax return, according to tax analyst Mark Luscombe of CCH, part of Wolters Kluwer.
Still, there are money-saving tax deductions and other strategies that you may be able to take advantage of, no matter how much you make. Here are eight ways to save:
- Moving-expense deduction. If you moved to take a new job due to a change in your job or business location—and paid for the move out of pocket—you may be able to deduct your moving expenses.
"Local moves don't apply. If you just moved to the other side of town, you won't be eligible" for this tax break, Luscombe said. If it's your first job, your new workplace must be at least 50 miles away from your old home to qualify. Other time and distance tests are required if you are moving to a new job.
- Capital loss deduction. The stock market had a very strong year in 2013, but some of your investments may not have fared as well. If your capital losses were more than your capital gains, you can claim a capital loss deduction of your total net loss up to $3,000, reducing your income dollar-for-dollar.
- Medical, dental expense deductions. Guidelines for tax-deductible medical expenses changed because of the Affordable Care Act. Your unreimbursed medical expenses must exceed 10 percent of your adjusted gross income to qualify for a deduction. That's up from 7.5 percent in the 2012 tax year.
However, the lower 7.5 percent threshold still applies for people age 65 and older until the end of 2016. Typical expenses may include unreimbursed medical and dental bills, equipment costs and medical supplies and devices.
- Health savings account. If you're covered by a high-deductible health plan, you may be able to set up a health savings account by April 15 and contribute up to $3,250 if you're single and $6,450 for families to the account. Contributions to the HSA will lower your taxable income dollar-for-dollar. Plus, contributions, earnings and withdrawals are tax-free when used to pay for qualified medical expenses.
If you have a small business or are self-employed, you have even more ways to reduce your tax bill.
- SEP IRA. If you're a sole proprietor, business owner or earn self-employment income, you also have until April 15 to set up and contribute to a SEP IRA for the 2013 tax year. You can contribute up to 25 percent of your compensation—or 20 percent of self-employment income—up to $51,000 in this account.
Like a traditional IRA, "if the SEP-IRA contribution is made before the filing due date of your return, it is deductible on your 2013 tax return," said Elda Di Re, a tax expert for Ernst & Young.
- Home-office deduction. If you're self-employed and work out of your home, there's a new option for claiming a deduction for a home office. Your deduction is based on the size of your home office, using a simple calculation: Deduct $5 for every square foot of work space used—up to a maximum of 300 square feet. So the maximum deduction is $1,500.
You can still calculate the home-office deduction the old way, figuring related expenses and how they may apply over the course of the year to a home office, but the new way is a lot simpler.
- Health insurance premium deductions for self-employed. Business owners and self-employed taxpayers may be able to deduct health insurance premiums, as long as they aren't already covered under their employer's or spouse's employer's plan.
- Business-expense tax deductions. If you're self-employed, a contractor or sole proprietor, you may be able to deduct qualified business expenses related to your work. Also, "if you are expending monies which are not reimbursed by the partnership, you can take those business expenses directly against your partnership income," Di Re said.
The IRS requires eligible business expenses be "ordinary" (something common and acceptable in that particular business) as well as "necessary" (something appropriate and helpful to the business). But Luscombe noted that taxpayers should keep in mind that "business expense deductions can only be taken once, either on your individual income-tax return or a separate business tax return—but not on both."