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Monday, April 16, 2012

Overlooked Tax Deductions

I received an email from Turbo Tax about one of their several "tax tip" "infographics" they provide. This one is called - Top 10 Tax Deductions You're NOT Taking.  I don't see any data on how they know they are the true top 10, but I guess they somehow know that these items are often overlooked.  (So, doesn't TurboTax then try to highlight them better?)

Why are such items as mileage for charitable driving, dependent care credit and moving expenses overlooked?  Perhaps individuals don't intuitively think of these items.  And, there are too many special rules so it is difficult to know them all.  Perhaps some of these items should go to the list of items that President Obama, and Congressmen Camp and Ryan have suggested eliminating to help simplify the tax law and lower rates.

I think additional overlooked items include maximizing contributions to retirement plans - again, too many options and rules.

What do you think?


Srividhya said...
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Srividhya said...

Hi Professor,
During my recent experience as a tax preparer I got an opportunity to think about what you have mentioned here. Even though there are lot of incentives that taxpayers can take advantage of most of them are not utilized to reduce tax liability. One reason I guess is the exceptions and special rules to take these deductions. For high income taxpayers these credits are phased out (for example American opportunity credit phased out at $180000,while the maximum credit is $2500 it varies based on AGI) and for low income tax payers unless they have enough itemized deductions over the standard deductions they can’t use these deductions. Another reason I think is the lack of awareness. I recently came across deduction for ‘tuition expenses for children with special needs” which taxpayers can deduct as part of their medical and dental expenses. I am not sure how many people would know such a deduction exists. Another example is educational expense deduction under Schedule A 2% floor. If a taxpayer incurs educational expenses to improve his job related skills, apart from taking education credit he/she could also deduct the cost of materials, travel, research and study expenses related to education as part of itemized deduction. Since many of the taxpayers do not know about this they don’t maintain records and bills to make use of this deduction.

Another issue is the frequent law changes which makes taxpayers difficult to keep track of these changes. One classic example is the property tax deductions for CA purposes. There was a new rule effective beginning this year which stated that the special charges paid along with property taxes are not deductible for California purposes. This rule was backed off just a few days before tax filing deadline as a result of which many taxpayers lost the extra deduction they would have got if such a change of provision was not enacted at all.

Overall I think such tax incentives would be more effective if there is enough awareness among taxpayers and they are simple to understand and follow.