Folks who continue to run their own businesses after qualifying for Medicare can deduct the premiums they pay for Medicare Part B and Medicare Part D, plus the cost of supplemental Medicare (medigap) policies or the cost of a Medicare Advantage plan.
This deduction is available whether or not you itemize and is not subject to the 7.5% of AGI test that applies to itemized medical expenses for those age 65 and older. One caveat: You can’t claim this deduction if you are eligible to be covered under an employer subsidized health plan offered by either your employer (if you have a job as well as your business) or your spouse’s employer (if he or she has a job that offers family medical coverage).
A credit is so much better than a deduction; it reduces your tax bill dollar for dollar. So missing one is even more painful than missing a deduction that simply reduces the amount of income that’s subject to tax. In the 25% bracket, each dollar of deductions is worth a quarter; each dollar of credit is worth a greenback.
You can qualify for a tax credit worth between 20% and 35% of what you pay for child care while you work. But if your boss offers a child care reimbursement account—which allows you to pay for the child care with pretax dollars—that’s likely to be an even better deal. If you qualify for a 20% credit but are in the 25% tax bracket, for example, the reimbursement plan is the way to go. Not only does money run through a reimbursement account avoid federal income taxes, it also is protected from the 7.65% Social Security tax. (In any case, only amounts paid for the care of children younger than age 13 count.)
You can’t double dip. Expenses paid through a plan can’t also be used to generate the tax credit. But get this: Although only $5,000 in expenses can be paid through a tax-favored reimbursement account, up to $6,000 for the care of two or more children can qualify for the credit. So if you run the maximum through a plan at work but spend even more for work-related child care, you can claim the credit on as much as $1,000 of additional expenses. That would cut your tax bill by at least $200.
ESTATE TAX ON INCOME IN RESPECT OF A DECEDENT
This sounds complicated, but it can save you a lot of money if you inherited an IRA from someone whose estate was big enough to be subject to the federal estate tax.
Basically, you get an income-tax deduction for the amount of estate tax paid on the IRA assets you received. Let’s say you inherited a $100,000 IRA, and the fact that the money was included in your benefactor’s estate added $40,000 to the estate-tax bill. You get to deduct that $40,000 on your tax returns as you withdraw the money from the IRA. If you withdraw $50,000 in one year, for example, you get to claim a $20,000 itemized deduction on Schedule A. That would save you $5,600 in the 28% bracket.
STATE TAX PAID FOR PRIOR YEAR(S)
Did you owe tax when you filed your prior year state income tax return? Then, for goodness’ sake, remember to include that amount in your state-tax deduction on your federal return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments during the year.
When you buy a house, you get to deduct in one fell swoop the points paid to get your mortgage. When you refinance, though, you have to deduct the points on the new loan over the life of that loan. That means you can deduct 1/30th of the points a year if it’s a 30-year mortgage. That’s $33 a year for each $1,000 of points you paid—not much, maybe, but don’t throw it away.
Even more important, in the year you pay off the loan—because you sell the house or refinance again—you get to deduct all as-yet-undeducted points. There’s one exception to this sweet rule: If you refinance a refinanced loan with the same lender, you add the points paid on the latest deal to the leftovers from the previous refinancing, then deduct that amount gradually over the life of the new loan. A pain? Yes, but at least you’ll be compensated for the hassle.
JURY PAY PAID TO EMPLOYER
Many employers continue to pay employees’ full salary while they serve on jury duty, and some impose a quid pro quo: The employees have to turn over their jury pay to the company coffers. The only problem is that the IRS demands that you report those jury fees as taxable income. To even things out, you get to deduct the amount you give to your employer.
But how do you do it? There’s no line on the Form 1040 labeled “jury fees.” Instead, the write-off goes on line 36, which purports to be for simply totaling up deductions that get their own lines. Include your jury fees with your other write-offs and write “jury pay” on the dotted line.
AMERICAN OPPORTUNITY EDUCATION CREDIT
Unlike the Hope Credit that this one replaced, the American Opportunity Credit is good for all four years of college, not just the first two. Don’t shortchange yourself by missing this critical difference. This tax credit is based on 100% of the first $2,000 spent on qualifying college expenses and 25% of the next $2,000 ... for a maximum annual credit per student of $2,500. The full credit is available to individuals whose modified adjusted gross income is $80,000 or less ($160,000 or less for married couples filing a joint return). The credit is phased out for taxpayers with incomes above those levels.
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