All too often, in the rush to file we forget some big tax breaks. Here are three to consider.
With the clock ticking toward tax time, don't let the panic to simply get your taxes done keep you from making sure you get every tax break you're entitled to. Here are three commonly overlooked ways to save:
No. 1: Seller-Paid Mortgage Points
Did you buy a home in last year? Then be sure to review your paperwork to see if the seller paid some (or all) of your points when you took out a mortgage to finance the deal. If so, you're in luck. Believe it or not, you're entitled to deduct those seller-paid points, even though someone else paid the tab. (You aren't going to find much better deals than this in the U.S. tax code.)
Claim your deduction on Line 12 of your Schedule A. You must then lower the tax basis of your home by the amount of your deduction. This will slightly increase your gain when you eventually sell the home, but chances are it won't matter much. After all, with the generous home-sale-gain exclusion privilege (up to $250,000 for singles and $500,000 for joint filers), it's unlikely you'll owe any federal capital-gains tax when you sell.
No. 2: Selling Grandma's Stuff
If you sold something last year that you inherited, understand that your tax basis for gain or loss purposes generally has nothing to do with what your benefactor paid for the asset. And that's probably going to save you a bundle in taxes. With inherited items, your tax basis is usually the asset's fair market value as of your benefactor's date of death. In other words, your tax basis is adjusted to that value, which is usually a very taxpayer-friendly outcome for assets owned for a long time, like a house or stocks.
An example should help. Suppose your grandmother died on April 5, 1998 and you inherited shares in AT&T (T), each of the remaining Baby Bells, Lucent Technologies (LU) and Qwest Communications (Q), which you subsequently sold last year to fund the downpayment on your new summer home. To figure out your tax gain or loss on those shares, do you have to go back and figure out what grandma paid for her original shares of Ma Bell in 1947 and then track that basis through the AT&T breakup and various spinoffs? No. You simply have to figure out what each of those stocks was trading for on April 5, 1998, and calculate your profit (or loss) from there.
Occasionally, the estate executor will choose to value the estate's assets as of the "alternate valuation date." In that case, your basis is equal to the asset's fair market value on the date you received it, or six months after the date of death, whichever came first. One other thing: Gains from inherited capital assets automatically qualify for favorable long-term gain treatment, regardless of the length of time they were actually owned by you or the person who left them to you.
No. 3: When You Adopt a Child
More and more people are adopting kids these days, which means more new parents are able to take advantage of the tax breaks associated with this. If you incurred expenses last year to adopt a child younger than age 18, you can generally claim a tax credit for up to $5,000 of adoption-related expenditures (such as adoption fees, legal fees, court costs, travel expenses, etc.). And your credit will be increased to $6,000 if you've adopted a child with "special needs" (provided he or she was born in the U.S. or is a U.S. resident). The credit reduces your tax bill dollar for dollar.
The only downside is that this deal is phased out for a parent (or parents) with adjusted gross income starting at $75,000 and ending at $115,000. Also, if you're married, you generally must file a joint return to claim the credit. To take the credit, fill out Form 8839 (Qualified Adoption Expenses) and file it with your 1040. Then enter the adoption-credit amount on Line 48 of your 1040.