Congratulations. You sent your 2008 tax return to the Internal Revenue Service on time. You even got a refund, in addition to the $600 tax rebate you qualified for based on your lower 2008 income level.
I'm sorry to have to wipe that smile off your face, tenacious taxpayer, but you left money on the table. Not to worry, though. With a little effort, you can get the money back and perhaps find a way to save on your 2009 taxes.
Most of us remember to deduct mortgage interest, property taxes, state income taxes and the like. But there are some tax breaks we sometimes fail to use. Here are five of the biggest breaks that get missed:
Excess Social Security taxes
If you're an employee, you pay a Medicare tax of 1.45% of your wages plus a Social Security tax of 6.2%. Though there's no limit on wages subject to Medicare, your 2008 Social Security tax was limited to the first $102,000 (it will rise to $106,800 in 2009).So if you worked for more than one employer and earned more than $102,000 in 2008, you had excess Social Security tax withheld. Your second employer withheld from dollar one in salary, regardless of what your former employer had taken out.
The maximum Social Security tax that you should have paid in 2008 was $6,324 ($102,000 x 6.2%). If you paid more than that, the excess is a credit against your income tax and should be reflected on line 65 of your Form 1040. (The maximum Social Security tax will rise to $6,621.60 in 2009.)
Deductible points from a refinancing
The Federal Reserve has cut interest rates many times since 2000 -- at least 10 times since September 2007 alone. And as rates fell, you may have refinanced your mortgage, maybe more than once. When you borrow money, your lender may charge you a percentage of the principal amount of your mortgage to increase its yield. These charges are called points. Each point is 1% of the mortgage principal.If you borrow, for example, $300,000 and are charged two points, that's an additional $6,000 you pay. Points paid on your original mortgage to purchase your home are normally allowable as an interest deduction on Schedule A if you itemize your deductions.
However, points paid on a refinance must be amortized over the life of the loan. So, if you paid $6,000 in points on a refinance, and there are 30 years on the new mortgage, you get to deduct $200 per year, or $16.67 per month.
But there are exceptions to the amortization requirement:
- If you use the dollars from the refinance to improve your principal residence, you can deduct all the points in the year paid.
- If you refinance a second time, any unamortized points on the first refinance may be deductible in full when you refinance again. Say you refinanced your $300,000 mortgage in January 2007 and paid $6,000 in points on a 30-year note from Commerce Bank. For 2007, you deducted $200 in additional interest. In January 2008, Citibank offered you a loan with a 2-percentage-point reduction in the interest rate, and you again paid $6,000 in points. For 2008, you could deduct as interest the $200 from the 2008 loan plus the full $5,800 balance on the original 2007 refinance.
Mortgage insurance
If you borrow more than 80% of the value of your home, your lender will normally require you to purchase private mortgage insurance, or PMI. Before 2007, the cost of the insurance was deductible only over the life of the loan and only for investment properties.But for 2007 through 2010, you can deduct PMI premiums as additional interest on Schedule A, line 13. The insurance contract must have been issued after 2006, the insurance must be paid in connection with home acquisition debt, and the deduction will disappear as your income increases. The deduction is phased out as your adjusted gross income increases between $100,000 and $110,000 ($50,000 and $55,000 if filing single).
Medical expenses
Expenses for medical care are allowed if you itemize your deductions. But you can deduct only the amount that exceeds 7.5% of your adjusted gross income.Still, as formidable a hurdle as that threshold is, don't overlook this area.
Medical care means any amounts paid for the diagnosis, care, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body. That's IRS talk meaning, "If it affects a part of your body, it's medical care." So, eyeglasses are part of your medical care because they affect your vision.
Here are some medical deductions that may have been missed:
- Electrolysis performed even by an unlicensed technician.
- Wigs for those who have lost their hair.
- A reclining chair recommended by a doctor for a patient with a cardiac condition.
- A swimming pool recommended by a doctor to alleviate a physical condition.
- Elastic stockings prescribed for an elderly patient.
- Expenses of travel to Alcoholics Anonymous meetings.
- Removal of lead-based paint from homes.
- Home improvements made to accommodate someone with a physical disability.
- Transportation for a parent who must accompany a child needing medical care.
- Premiums for long-term care (limited based upon your age).
- The cost of an overseas trip for medical or dental treatment.
Investment expenses
Sure, you deducted your investment magazines and the fees you paid your broker to manage your account. You even deducted investment miles and phone calls.But did you take the easy way out and let your broker subtract your annual IRA or retirement fee directly from your retirement account? If so, you missed another deduction, and you reduced the amount of your retirement account that would otherwise have grown tax-deferred.
Write a separate check for that annual fee. Deduct it as an investment expense and allow your retirement funds to appreciate even more. You get a double benefit here: both a current deduction and a bigger investment account growing tax deferred.
Roth IRA contributions
This one isn't really a deduction. But it's an awesome tax-advantaged investment that you should've made.How'd you like to make a contribution to your Roth individual account even if you don't qualify?
If you made more than $116,000 in 2008 ($169,000 on a joint return), you don't qualify for a Roth IRA contribution. For 2009, the limits rise to $120,000 for individuals and $176,000 for couples.
But we don't care about no stinkin' rules!
Here's how to contribute to your Roth even though the rules say you can't.
Open a nondeductible IRA. There are no income limitations for a nondeductible IRA contribution. In 2010, the rules will change. That year, all income limits for converting IRAs into Roth IRAs will disappear. So in 2010, you should convert your nondeductible IRA into a Roth IRA.
The cost of the conversion is that you have to pay tax on any income earned up to the date of the conversion. But the payment of the tax on that income can be spread over two years, 2010 and 2011. You'd pay 50% of the tax in 2011 and the balance in 2012 when you filed. That minimal hit should be well worth the value of creating and qualifying for the Roth IRA's total and permanent exclusion from taxation.
Let's work the system a little more: Consider investing your nondeductible IRA contributions in, say, a certificate of deposit that doesn't credit any interest until February 2010. If you then convert to a Roth IRA in January 2010, there's zero tax to be paid!
How to get your money back
You have until April 15, 2012, to amend your 2008 tax return. If you missed any of the deductions listed above, file a Form 1040X (.pdf file) and have the IRS send you some more money. Unfortunately, even if you had an extension, you had only until April 15 to make your IRA contributions.But, in any case, don't forget the opportunity to make fetal Roth contributions into your nondeductible IRA for 2009.