Taxes 101: Don't Overlook These Tax Credits, Deductions
Students, job hunters, low-income earners can benefit.
Feb. 14, 2011 — -- Today is the first day that the IRS is allowing people who itemize their deductions to file their tax returns.
The agency had needed the extra time to reprogram its computers because of changes in the tax code.
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Mellody Hobson, "Good Morning America" personal finance contributor and president of Ariel Investments, Inc., appeared on "GMA" today to answer questions about the most overlooked deductions and tax credits.
Q: How is a credit different from a deduction?
A: A tax credit actually reduces your taxes, dollar for dollar, but a tax deduction just decreases your taxable income, Hobson said.
For example, with a $1,000 tax credit, you would actually owe $1,000 less in taxes. With a deduction, depending on what tax bracket you are in -- for example, if you are in the 25 percent tax bracket -- a $1,000 deduction would take $250 off of your tax bill, she said. You can claim a tax credit even if you don't itemize your taxes, she added.
Q: What is one of the most over-looked tax deductions?
A: With more than 70,000 pages in the tax code, it's easy to understand how someone could miss a tax deduction. Some 46 million people claim about $1 trillion in itemized deductions, Hobson said. Roughly double that number use standardized deductions and they claim another $700 billion, she added.
If you are among the approximately 10 percent of Americans who were jobless last year, you may have a tax deduction coming, she said. Job hunting expenses can be deducted, provided your total miscellaneous itemized deductions are greater than 2 percent of your adjusted gross income, she said. She added that such expenses could include the cost of printing resumes, food and cab fares. But the catch is that you must be looking for a job in the same field as when you last worked, she said.
Q: Are first-time job hunters ineligible for job search-related deductions?A: No. They can take a deduction for expenses related to moving to find their first job, and they don't have to itemize their deductions to get this, Hobson said.
If they move at least 50 miles, their moving costs can be deducted, she said. Expenses such as highway tolls and parking are included, and they can even claim 16 ½ cents per mile deduction, she added.
Q: Are there any breaks for college students?
A: Yes. The American Opportunity Tax credit allows for $2,500 of college tuition to be claimed as a credit, she said. It covers all four years of school and the full credit may be claimed by single people who earn $80,000 or less, or by married couples who earn $160,000 or less, she said.
Q: Is there a credit for saving?
A: If you make a contribution to a retirement account -- such as an IRA or a 401(k) -- you could be eligible for up to $1,000 in credit if you're single, and up to $2,000 for married couples, Hobson said.
To qualify, single filers must make less than $27,750 and married couples, under $55,500.
If you're going to claim this credit, you must be over 18, not a full-time student and cannot be claimed as a dependent by anyone else.
The actual credit is based on your filing status, how much you contribute to your retirement account and how much you make. The more you contribute, the less you earn and the higher your credit will be, Hobson noted.
To claim this credit, you must complete Form 8880 – also known as the Credit for Qualified Retirement Savings Contributions. You can get the form, and instructions for calculating how large your credit will be, at www.irs.gov.
Q: Are their breaks for low-income earners?
A: Yes. Nearly 90 percent of Americans have benefited from the Making Work Pay tax credit, Hobson said.
She explained that this benefit reduces payroll taxes for eligible employees. Individual filers got an extra $400 per year and couples got twice that. To get the savings, you must claim the credit on your tax return using Schedule M.
Web-Extra Tips
Although you can deduct the value of items you donate to charity, you cannot deduct the value of any time or labor you may have given to a charity's project. You can also deduct 14 cents a mile for any driving you may have done for charitable work.
If you are divorced and pay alimony, you can deduct it from your taxes even if you do not itemize your deductions. If you receive alimony it is considered taxable income on your tax return.
When you're completing your tax forms, be careful. Simple errors -- such as putting your social security number down wrong -- could delay your refund. One of the best ways to prevent mistakes is to file your taxes electronically.