Five Overlooked Tax Breaks

Trimming your tax bill puts money in your pocket, so don’t miss these frequently overlooked opportunities to save, as well as a second chance to qualify for a tax rebate if you didn’t get it last year.

Retirement savers’ tax credit. You may earn two valuable tax breaks by contributing to a retirement-savings plan. Not only can you lower your taxable income by contributing to a 457 plan, or build tax-free income when investing in a Roth, but you may also qualify for a tax credit just for contributing.

The savers’ credit is worth $1,000 if you contributed $2,000 to a traditional IRA, Roth IRA, 401(k), 457 or other retirement plan in 2008, and if your adjusted gross income was less than $16,000 if single or $32,000 if you’re married and file a joint return. Smaller credits are available until income passes $26,500 if single, or $53,000 if married. Even if your income is too high for the credit, you may know a low-earning adult child or grandchild who could benefit, and maybe even volunteer to help them fund an IRA in order to earn this generous credit. IRA contributions for 2008 can be made as late as April 15.

Deducting refinancing points. You can deduct the points paid when you refinanced your house, but the rules are tricky. Points paid to refinance must generally be deducted over the life of the loan—so if it’s a 30-year mortgage, you can deduct 1/30th of the points per year ($33 a year for each $1,000 of points paid—just half that much the first year if you closed the loan on July 1, for example). But you can deduct the remaining portion of the points in the year you pay off the loan, whether you sell the house or refinance again with a different lender. If you refinance with the same lender, you deduct points paid on both deals over the life of the new loan.

New property-tax deductions. You generally need to itemize deductions in order to write off your property taxes. But non-itemizers—and that’s most of us—can add up to $500 (or $1,000 for married couples) paid in property taxes to their standard deduction amounts when filing their 2008 taxes.

Writing off state sales taxes. For 2008 tax filing, you can choose between deducting state and local income taxes or state and local sales taxes. This option can be valuable if you live in a state that doesn’t impose an income tax or if you earned little income for the year. The deduction is based on your state and income level; the IRS Web site has a calculator to help you with the math.

Second chance for a tax rebate. Last year’s rebates—$600 for most singles, $1,200 for married couples, plus $300 for each qualifying child—were really a prepayment of the “recovery rebate credit” you’ll see on your 2008 tax forms. Most taxpayers got all their money via the rebate check, but millions deserve more…and they’ll get it by claiming the credit. The rebate was based on 2007 tax information; the credit relies on 2008. So, if your income was too high to get the full rebate, but it fell in 2008, you might deserve a credit. This might also be the case if you had a child in 2008; that event can be worth a $300 credit. Young adults who were claimed as dependents on their parents’ returns in 2007 but who are independent taxpayers now are likely in line for a $600 credit. Finally, divorced parents who alternate claiming their children can get the rebate and the credit. If Mom claimed the kids on her 2007 return, she was eligible to get the rebate; if Dad claims them for 2008, he can get the $300 per child credit. For more information, see the IRS Recovery Rebate Center.

If you have already filed and missed any of these breaks, you have up to three years to file an amended return and get back extra cash. See Form 1040X and its instructions.

ICMA-RC does not offer specific tax or legal advice. Please consult with your personal advisor for additional assistance prior to implementing any new tax or legal strategy.