How to get more tax deductions
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Experts say Americans might be leaving billions of dollars in uncollected tax deductions. Tax columnist Kevin McCormally sniffs out the surprising ways you could get more money back.
MICHEL MARTIN, HOST:
I'm Michel Martin and this is TELL ME MORE from NPR News. Now it's time for our Money Coach conversation where we take a look at matters of personal finance and the economy. And by now, you may have a little pile in the corner somewhere stacked with receipts and W-2s. Tax time is upon us. There's a little over a month before that April 15 deadline. But according to our next guest, take your time because there are quite a few deductions that consumers often overlook. And those deductions could mean more in your pocket. Here to tell us more is Kevin McCormally of Kiplinger Personal Finance magazine. And he wrote about deductions recently for that publication. Kevin, thanks so much for joining us.
KEVIN MCCORMALLY: Michel, I'm happy to be here. Let's help some people.
MARTIN: All right, so, you know, there's this popular ad out there now for a - that people have probably seen for a widely known tax-preparation service, shall we say, and paraphrasing here - get your money, get your money back, America. So do people really leave that much money behind?
MCCORMALLY: Well, that's - it's funny, I saw that ad on a bus when I came over today. And it's get your billion back, America. And it's suggesting that people who do their own returns leave a billion dollars on the table and that's really quite quaint because it's got to be more than a billion dollars. Fifty million people do their own returns - dividing that into $1 billion dollars, that's $20 a person.
MARTIN: So you think it's actually more than that?
MCCORMALLY: Oh, I think it's far more. We just had an email yesterday from a woman who was doing her return - 2013 - and she was thrilled to discover that she deserved a $2,500 American Opportunity Credit for the tuition she paid for her son who's a junior in college. She was dismayed, though, to discover that she failed to take that credit when he was a freshman and a sophomore. And she asked us what could we do? And we said file an amended return, it's easy. She's going to do that and that will bring her back $5,000 that she had overlooked. And the cool thing about it, Michel, is the IRS has to pay her interest on that $5,000 back to the original due date of those returns.
MARTIN: Well, that's good news. So let's go into the details then. Is that one of the most common deductions that people overlook? Or what are the most common ones?
MCCORMALLY: Well, tax credit can be a big one - more important than the American Opportunity Credit, that's the one that families can claim for the first four years that a child is in college. That's pretty well known - colleges talk about it. But there's also a $2,000 credit called the Lifetime Learning Credit that you don't have to be a full-time college student, you can take it for yourself. If you go back to a school to take a course that can in any way possibly help you earn money, you can claim this $2,000 credit. And it's 20 percent of the first $10,000 you spend on tuition.
MARTIN: You were saying also that people miss a lot of deductions around the edges, like things related to job hunting, like printing their resumes or, you know, printing materials that they need to go look for a job - that people often miss that.
MCCORMALLY: Michel, a lot of people miss a lot of things. First of all, about two-thirds of the people take the standard deduction. And most of those people think that means they can't claim any deductions. And that's crazy because there are things called adjustments to income. And I suggest that everybody print out the front page of the 1040 form. And at the bottom of that form are 13 items that anybody can deduct. You don't have to itemize, even if you take the standardized deduction. And one of those is moving expenses for a job. You don't have to itemize in order to claim that. If you move at least 50 miles away, basically, you can deduct the cost of getting yourself and your goods. That's good.
Job hunting expenses is a little different. Job hunting expenses have to be an itemized deduction. So that means only about a third of the people can claim it. And it's called a miscellaneous expense deductible only to the extent that all of your miscellaneous expenses exceed 2 percent of your adjusted gross income. You keep track of those expenses. You know, if you fly cross-country for a job interview, that's deductible even if you don't get the job, you know. And it's what you pay for the hotel, it's half of what you paid for food, you know. If it's just in town and just your resume, you're probably not going to make that 2 percent.
MARTIN: Another deduction you say people often miss out on are those related to out-of-pocket charitable contributions. What is it that people are missing?
MCCORMALLY: What I'm talking about is - I attend a church just at the other side of Capitol Hill, and we have a big soup kitchen casserole-making army. And everybody who makes a casserole, you know, they pay maybe $20 a month for the ingredients. That's what we're talking about out-of-pocket. Keep track of that $20. Now some people say that's chintzy. Why do you want to take that deduction? Well, $20 x 12 - $240 - that might save you $75, and then you've got more money to be generous with.
MARTIN: Is it possible that one reason people don't claim these kinds of things is that they're afraid they'll be audited?
I think that is part of the logic. And we're supposed to be afraid of audits because that's how we all stay on our toes. But, you know, fewer than 1 percent of all returns are audited.
MARTIN: Well, no, some of us pay because they think - people think it's the right thing to do.
MCCORMALLY: Well, I think - well, you know.
MARTIN: It's your obligation as a citizen.
MCCORMALLY: Well, there was just a study by the IRS Oversight Board that said 86 percent of Americans believe it's their obligation to pay their taxes, and they pay in full. Now 12 percent said they thought it was all right to cheat a little bit or a lot. It was a long range. But people are afraid of audits. I think people - the best example there I think is home office deductions It's one that everybody says is a red flag for an audit. And if you work in your home and you have a space that is used regularly and exclusively for your business, then the IRS says you can claim all sorts of deductions. People skip it 'cause they're afraid it's going to be an audit. I've looked at the statistics, and more people successfully claimed the home office deduction each year than all the people who are audited.
MARTIN: One thing you said - were telling us that if you go back to school yourself for education that's related to, you know, employment, improving your employment, you know, making money, you said that there's a deduction for that. You say that some parents who are paying their children's student loans might not be able to deduct that expense, but their kids can. Now why would it be that way?
MCCORMALLY: OK, so if people got the trade around deductions who got to write-off things, we'd all select the person in the highest tax bracket to take the deduction. So in order to deduct any interest, the basic rules are, one, you must be legally obligated to pay it. And, two, you must pay it. And for years, parents were paying their kids' student loans back. They lost out because they were not legally obligated. It's the kids' obligation. About eight years ago, the IRS decided to have a heart and say wait a minute, from now on, we're going to pretend that the parents gave the money to the kids and the kids paid it. So the kids at least get that deduction. This is after the kid is no longer a dependent.
MARTIN: So if a parent is paying - whoever's paying the student loan back, that there are circumstances under which you can deduct that.
MCCORMALLY: Right. If the student is using his or her - or the graduate is using his own money to pay it back, $2,500 a year of that interest is deductible. But if the parent is paying that for the child, the child still gets the deduction. The parent doesn't.
MARTIN: The child can still get the deduction.
MCCORMALLY: Right. They'll let the child have that deduction 'cause it's not costing the government as much as if the parents got it.
MARTIN: Now what about people who are taking care of elderly parents? Are there any circumstances under which one can claim a deduction for taking care of a senior citizen?
MCCORMALLY: There are circumstances, but they're really tough because there's an income limit. If that person earns more than $3,950 last year, he or she can't be your dependent. And that's the key way that you're going to be able to get the support. If they're your dependent, you get an exemption worth $3,950, and that's going to save you money on your taxes. But it's tough.
MARTIN: Finally, this is the time of year I think where people are thinking a lot about taxes both on a personal level and a kind of as a - on the - kind of the policy level. There is another proposal out there now to simplify the tax code. This one was delivered by Representative Dave Camp. He's a Republican from Michigan. He's the chair of the House Ways and Means Committee, which is the tax writing, you know, committee. He recently announced a proposal that's supposed to simplify the tax code. But one of the key features, there would be some changes to the standard deduction for people who don't itemize their deductions. Can you just talk a little bit about that? Pros and cons.
MCCORMALLY: Well, Camp's plan has been in the making for years. And he loses the chairmanship of the committee at the end of this year. He'd love to get something done. This is the plan that Speaker Boehner said blah, blah, blah, blah, blah, and he's in the same party. The plan's not going to go anywhere. But what it really shows is how difficult it is to do tax reform, to pull down tax rates. That's what Camp and everybody wants to do. They want to get rid of this 39.6 percent rate. They want to put people in lower brackets. But to do that, they've got to get rid of deductions. It's fascinating to look at this plan. It's about four inches thick. I've got it on my desk at work. It - the tax code is so complicated. Attempts to simplify it are not easy.
MARTIN: Kevin McCormally is editorial director of Kiplinger Personal Finance magazine. He joined us here in our Washington, D.C. studios. Thanks so much for joining us.
MCCORMALLY: Thank you, Michel.
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