At almost 4 million words long and showing no signs of shrinking, the federal tax code is one of the most unwieldy compilations of legislation in our federal government. However, finding the deductions you can use to reduce your taxable income can help you make financial decisions that lower your taxes and increase your long-awaited refund check.
Maximize Your Pre-tax Retirement Contributions
That 401(k) plan your employer told you about during your interview might not sound as awesome as the pool table and big screen TV in the break room, but it's likely to be worth a lot more. Each dollar you put into a pre-tax account, like a 401(k), reduces your taxable income. If you've already maxed out your retirement plan at work, check to see if you can deduct a contribution to a traditional IRA. When you have a retirement plan through your employer, you can only deduct your traditional IRA contribution, and thereby increase your tax refund for the current year, if your modified adjusted gross income falls below the annual limits. For example, if you are single in 2012 you will lose your IRA deduction if you make more than $68,000 and you have a plan at work, or if you are married and covered at work, you will lose your deduction at $112,000 or more. You can always deduct your contributions to a traditional IRA if neither you nor your spouse can contribute to a plan at work.
If you itemize your deductions, you get to claim either your state income taxes or state sales taxes paid during the year. You should claim whichever one gives you the larger deduction. If you live in a state with low income taxes or no income taxes, total up your receipts or use the estimated sales tax calculator on the IRS website to figure your deduction. If you use the state income tax deduction, make sure you account for however much you paid at tax time last spring. For example, if you paid $500 when you filed your 2011 state return in the spring of 2012, you can include that $500 as state income tax paid on your 2012 federal return.
Student Loan Interest
You can deduct up to $2,500 of student loan interest from your taxes as long as your income isn't too high. Since this is an above-the-line deduction, you can still use it even if you don't itemize. Better yet, you don't even have to be the one paying it back to claim the deduction. If only your name is on the loan, but your parents are still generously paying it off for you, you get the deduction. Yay!
If you've been transferred and meet the requirements, any unreimbursed moving expenses can also be taken as an above-the-line deduction. To qualify, your new job has to be at least 50 miles further from your old home than your old job and you have to work 39 of the first 52 weeks you're in your new home. Sorry, as awesome as your promotion is, moving up to the 15th floor doesn't cut it. Expenses you can count if you qualify include driving to your new home and lodging along the way, moving your personal goods and even the cost of get Fido and any other pets to your new home.
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