16 Great Tax Deductions You May Have Overlooked

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There are so many frequently missed deductions, according to the IRS, that I cant see anyone with a life outside of professional income tax preparation wading through them all. I have, therefore, vetted them for you so you can jump to the categories that apply to you and skip the rest.
First of all, lets draw a distinction here. Though most people speak in generic terms of income tax deductions, (as our title implies), there are also frequently overlooked adjustments and frequently overlooked credits. This is an important distinction, because not all taxpayers are able to amass enough itemized deductions to exceed their standard deduction, so itemized deductions do them no good. Generally speaking, though, most people can use adjustments and credits if they qualify for them. Adjustments reduce your Adjusted Gross Income (AGI), and credits reduce your tax.
Here's an explanation of my vetting process: If you are NOT able to accumulate enough itemized deductions to exceed your standard deduction (see the chart titled "2010 Standard Deductions" below), then skip the section For Those Who Itemize Their Deductions and move on to For Itemizers and Non-Itemizers and beyond.
Itemized deductions, if you're not familiar, include such things as mortgage interest, investment interest, state income taxes, property taxes, charitable contributions, unreimbursed medical expenses in excess of 7.5% of your AGI, miscellaneous itemized deductions like unreimbursed work expenses and tax preparation fees and expenses, and the other frequently overlooked deductions included below.
2010 Standard Deductions

$5,700 for single filers
$5,700 for married couples filing separately
$11,400 for married couples filing jointly
$8,400 for head-of-household filers
$11,400 for qualifying widow(er)s

The IRS has a Should I Itemize or Take the Standard Deduction? calculator to aid in your decision. For an extensive overview of whether you should itemize your deductions, check out this handy guide from TurboTax.
Deduction Categories

For Those Who Itemize Their Deductions
For Itemizers and Non-Itemizers
For the Self-Employed
For Those Selling Investments
For Students and Their Parents

For Those Who Itemize Their Deductions
1. Non-Cash Charitable Contributions
This is my favorite overlooked deduction, because many people take things to their local Salvation Army or Goodwill without even thinking of the potential tax benefit. If you keep track of these items and document them, you can deduct the lesser of your basis for the items or their fair market value at the time you donate them. These items can really add up depending upon how charitable you have been. If the deduction amounts to more than $500 for the year, you will be required to file another form to back it up, providing considerably more information.
Your basis is usually the original cost to you. If you received an item as a gift, your basis would be the cost to the person who gifted it to you. If an item was bequeathed to you upon someones death, your basis would be the fair market value of the item at the date of that persons death.
2. Sales Taxes
This one makes the most sense for people who live in states without a state income tax, because it is only available in lieu of the state income tax deduction, and state income taxes usually exceed sales taxes. The IRS has tables indicating the amounts of sales tax deductible by state. However, if you purchased a vehicle during 2010 (including automobiles, boats, and airplanes), you can add the amount of sales tax paid on that transaction (at your own states sales tax rates, in case you purchased out-of-state) to the amount on the IRS chart. If this results in a bigger deduction than state income taxes would, go for it!
3. State Income Taxes Paid with Last Years Return
If you decide that income taxes provide the greater deduction, dont forget the amount you had to pay with your 2009 income tax return when you filed it in 2010! Many people apparently do.
4. Personal Property Taxes
In many states, if you own a car, a boat, or a luxury asset, you are assessed personal property tax on it. Sometimes it can be part of your vehicle licensing fee. Sometimes it can be billed as personal property tax by your county.
5. Points Paid on Purchasing or Refinancing Your Home in 2010
If you paid points on the purchase of your personal residence in 2010, the entire amount is deductible this year. If you paid points to refinance your home in 2010, you must amortize the points (deduct them a little bit at a time) over the life of the loan. So if you paid $3,600 in points to refinance your home over a 30 year mortgage, you would deduct $10 per month over the life of the loan ($3,600/360 months).
6. Points Paid in a Prior Year
If you had to amortize points paid on refinancing on a previous years return, dont forget to keep deducting them over the entire life of the loan.
7. Job-Hunting Costs
This is a timely topic for many given the current unemployment conditions in the country. As long as you are not hunting for your first job ever, your costs (such as long-distance calls, travel to and from interviews and meetings, postage, and printing) may be deductible. The catch is that they fall under the heading, Miscellaneous Itemized Deductions, which only help your cause to the extent that they exceed 2% of your AGI. Other miscellaneous itemized deductions include union dues, tax-preparation costs, safe deposit box fees to store investments, and unreimbursed employee business expenses. If the aggregate of all these expenses exceeds 2% of your AGI, the excess helps your cause.
(See also: How Getting a New Job Can Affect Your Taxes)
For Itemizers and Non-Itemizers
8. Armed Forces Reservists Expenses
For those of you brave men and women serving our country as reservists in the armed forces, you get special treatment for your employee business expenses. Unlike most other employees, who must be able to itemize their deductions in order to deduct their expenses (and then only after reducing them by 2% of their AGI), you get a deserved break. Your qualifying expenses for travel more than 100 miles from home go straight from Form 2106 to line 24 of your Form 1040 no itemizing or 2% reduction necessary. See Form 2106 instructions (PDF) for line 10.
9. Moving Expenses to Take a New Job
This is another timely topic in todays economy. The good news is that this is another adjustment for non-itemizers, and (unlike job-hunting costs) it also applies to people getting their very first job. If you have to move 50 miles farther away from your old home than your old job was to take a new job, keep track of the costs. Allowable expenses include transportation of household goods and personal effects, the mileage to move your car (at 16 cents per mile for tax year 2010), and lodging while on the road. See IRS Form 3903 (PDF) to make sure you meet the time and distance requirements.
10. Educator Expenses
If you are an eligible educator (K-12 teacher, instructor, counselor, principal, or aide who works more than 900 hours during the year at a school), you can deduct up to $250 of ordinary, necessary expenses you paid out of your own pocket in connection with your work. If your spouse is also an educator, you can each deduct up to $250. See Form 1040 instructions (PDF) for line 23.
11. Energy Saving Home Improvements Credit
If you invested in energy-efficient improvements to your home, such as insulation, windows, doors, or roofing, you are entitled to a credit against your taxes. The credit amounts to 30% of the investment, to a maximum of $1,500 for 2009 and 2010 combined. Remember, a credit reduces your taxes, not just your income. After 2010, the maximum credit will drop back down to $500 per year. See Form 5695 (PDF) instructions.
12. First-Time Homebuyer and Long-Time Resident Homebuyer Credits
The deadline for closing a house deal qualifying for this credit was extended from June 30, 2010 to September 30, 2010. You must have entered into a binding contract to buy a home in the U.S. by April 30, 2010. To qualify for the First-Time Homebuyer Credit, neither you nor your spouse can have owned a home for the previous three years. To qualify for the Long-Time Resident Homebuyer Credit, you and your spouse must have lived in the same residence for any consecutive five year period of the eight-year period ending on the date the new home was purchased. The maximum first-time credit amount is $8,000, and the maximum long-time credit amount is $6,500. See Form 5405 instructions (PDF) for details.
For the Self-Employed
13. Health Insurance Reduction to Self-Employment Income
Heres a brand new one for the growing class of self-employed. While you have been able to reduce your AGI by varying percentages of your health insurance premiums over the years, you are now allowed to reduce your self-employment income by the same amount. Thus, not only is your regular income tax based on the reduced income amount, but so is your self-employment tax. (For the uninitiated, this is a separate tax that covers both the employers and employees portions of Social Security taxes.) This is an obscure deduction that is somewhat hidden in ambiguous wording on line 3 of Schedule SE (PDF), so here is your heads-up.
For Those Selling Investments
14. Reinvested Dividends
This is admittedly a smaller subset of people those selling stock or mutual funds in which their dividends have been reinvested to buy more of the investment. They have paid taxes on the dividends even though they havent received dividend checks. So the reinvested dividends add to the basis of the stock sold, thereby reducing the capital gains and the resultant taxes.
For Students and Their Parents
15. American Opportunity Credit
This credit allows for up to $2,500 of qualifying expenses for each qualifying student, to offset income taxes, for up to four years. This cannot be used with the Lifetime Learning Credit, which allows up to $2,000 per year, but is not limited to four years per student. For more details, see IRS Publication 970 Tax Benefits for Higher Education.
16. Student Loan Interest Paid for You by Your Parents
If you otherwise qualify to deduct your student loan interest, but it doesnt occur to you to do so because your parents are paying it for you, read on.
According to the IRS, you may claim the student loan interest deduction if you meet all of the following requirements:

Your filing status is not married filing separately
You (and your spouse if filing jointly) are not claimed as a dependent in the exemptions section of another persons tax return
You are legally obligated to pay interest on a qualified student loan
You paid interest on a qualified student loan

Your parents are not allowed to deduct the interest because they do not meet the third requirement they are not legally obligated to pay the interest. You may think you dont meet the fourth requirement because you did not actually pay the interest yourself. However, in the eyes of the IRS, your parents have gifted you the money to make the payment, and you have paid it yourself. So, if you meet all of the other requirements, you are entitled to the deduction, which can amount to as much as $2,500. This is taken as an adjustment to your income, so you do not have to itemize your deductions to benefit. See the Form 1040 instructions (PDF) for more information.

Written by Marla Walters and published on Wise Bread. Read more Taxes articles from Wise Bread.Best Money Tips: How to Wake Up Without Coffee
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