Tax Breaks

The Most-Overlooked Tax Deductions

Here are the top 19 breaks -- including six new ones -- that you shouldn't pass up.

By Kevin McCormally, Editorial Director, Kiplinger.com

November 2009

Every year, the IRS dutifully reports the most common blunders that taxpayers make on their returns. And every year, at or near the top of the "oops" list is forgetting to enter their Social Security number at the top of the tax form -- or making a mistake when entering those nine digits.

Review our breaks as a slide show.

No doubt about it: The opportunity to make mistakes is almost unlimited, and missed deductions can be the most costly. About 46 million of us itemize on our 1040s -- claiming nearly $1 trillion worth of deductions. That's right: $1,000,000,000,000, a number rarely spoken out loud until Congress started debating economic-stimulus plans to combat the Great Recession.

Another 85 million taxpayers claim more than a half-trillion dollars' worth using standard deductions?and some of you who take the easy way out probably shortchange yourselves. (If you turned 65 in 2009, remember that you now deserve a bigger standard deduction than the younger folks.)

Yes, friends, tax time is a dangerous time. It's all too easy to miss a trick and pay too much. Years ago, the fellow who ran the IRS at the time told Kiplinger's Personal Finance magazine that he figured millions of taxpayers overpaid their taxes every year by overlooking just one of the money-savers listed below:

1. State sales taxes. Although all taxpayers have a shot at this write-off, it makes sense primarily for those who live in states that do not impose an income tax. You must choose between deducting state and local income taxes or state and local sales taxes. For most citizens of income-tax states, the income tax is a bigger burden than the sales tax, so the income-tax deduction is a better deal.

The IRS has tables that show how much residents of various states can deduct. But the tables aren't the last word. If you purchased a vehicle, boat or airplane, you get to add the state sales tax you paid to the amount shown in the IRS tables for your state, to the extent that the sales-tax rate you paid doesn't exceed the state's general sales-tax rate. (Download IRS tables in .pdf format here).

The same goes for any homebuilding materials you purchased. These items are easy to overlook, but they could make the sales-tax deduction a better deal even if you live in a state with an income tax. The IRS even has a calculator on its Web site to help you figure the deduction, which varies depending on the state where you live and your income level.

2. Reinvested dividends. This isn't really a deduction, but it is a subtraction that can save you a bundle. And this is the break that former IRS commissioner Fred Goldberg told Kiplinger's a lot of taxpayers miss.

If, like most investors, your mutual fund dividends are automatically used to buy e...