Tax season can be a stressful time for many Americans, but it’s also an opportunity to save money. According to the Internal Revenue Service (IRS), roughly 75% of taxpayers overpay on their taxes each year. One key reason for this is overlooking valuable deductions.
This article will explore 18 tax deductions you might be overlooking that could potentially save you hundreds or even thousands of dollars.
Tax Deductions You Might Be Overlooking
Tax deductions reduce your taxable income, which in turn lowers your tax bill. While most people are familiar with common deductions like mortgage interest and charitable donations, many lesser-known deductions go unclaimed each year. Understanding these overlooked deductions can help you keep more of your hard-earned money.
It’s important to note that tax laws change frequently, and not all deductions apply to everyone. Always consult with a qualified tax professional or use reputable tax software to ensure you’re claiming the right deductions for your specific situation.
Let’s dive into the 18 tax deductions you might be overlooking:
1. State Sales Tax
If you live in a state with high sales tax but low or no income tax, you might benefit from deducting state and local sales taxes instead of state and local income taxes.
- How it works: You can choose to deduct either state and local income taxes or state and local sales taxes, but not both.
- Who can claim it: This is especially beneficial for residents of states with no income tax, like Florida, Texas, and Washington.
- Potential savings: The amount varies based on your purchases and local tax rates.
2. Out-of-Pocket Charitable Contributions
Many people remember to deduct large charitable donations, but smaller out-of-pocket expenses often go unclaimed.
- How it works: You can deduct expenses incurred while doing charity work, such as ingredients for meals you prepare for a nonprofit organization or mileage driven for charitable purposes.
- Who can claim it: Anyone who itemizes deductions and volunteers for qualified charities.
- Potential savings: The standard mileage rate for charity-related driving is 14 cents per mile.
3. Student Loan Interest Paid by Parents
If you’re a parent who helps your child pay off student loans, you might be eligible for a deduction.
- How it works: If you’re not claimed as a dependent and you’re legally obligated to pay the loan, you can deduct up to $2,500 of student loan interest paid.
- Who can claim it: Parents who help with student loan payments and meet income requirements.
- Potential savings: Up to $2,500 in deductions, depending on your tax bracket.
4. Moving Expenses for Military Personnel
While the Tax Cuts and Jobs Act of 2017 eliminated the moving expense deduction for most people, it’s still available for active-duty military members.
- How it works: You can deduct unreimbursed moving expenses related to a military-ordered move.
- Who can claim it: Active-duty military personnel moving due to a change of station.
- Potential savings: Varies based on moving costs.
5. Child and Dependent Care Credit
This credit is often overlooked by parents who pay for childcare.
- How it works: You can claim a credit for a percentage of childcare expenses, up to $3,000 for one child or $6,000 for two or more children.
- Who can claim it: Parents or guardians who pay for care for children under 13 or disabled dependents.
- Potential savings: Up to $1,050 for one child or $2,100 for two or more children.
6. American Opportunity Tax Credit
This credit is available for college students or their parents.
- How it works: You can claim a credit of up to $2,500 per eligible student for qualified education expenses.
- Who can claim it: Students or their parents who pay for qualified higher education expenses.
- Potential savings: Up to $2,500 per eligible student.
7. Lifetime Learning Credit
This credit is similar to the American Opportunity Tax Credit but has different rules and can be used for a broader range of education.
- How it works: You can claim a credit of up to $2,000 per tax return for qualified education expenses.
- Who can claim it: Students or their parents who pay for qualified education expenses, including graduate school or professional courses.
- Potential savings: Up to $2,000 per tax return.
8. Earned Income Tax Credit (EITC)
This credit is designed to benefit low- to moderate-income workers but is often overlooked.
- How it works: The credit amount varies based on income, filing status, and number of children.
- Who can claim it: Working individuals and families who meet income requirements.
- Potential savings: For 2021, the maximum credit ranges from $1,502 to $6,728 depending on filing status and number of children.
9. Health Savings Account (HSA) Contributions
Contributions to an HSA are tax-deductible and often overlooked.
- How it works: You can deduct contributions to your HSA, even if you don’t itemize deductions.
- Who can claim it: Individuals with high-deductible health plans who contribute to an HSA.
- Potential savings: For 2021, you can contribute up to $3,600 for individual coverage or $7,200 for family coverage.
10. Self-Employment Expenses
Self-employed individuals can deduct many business-related expenses.
- How it works: You can deduct expenses like home office costs, supplies, and travel related to your business.
- Who can claim it: Self-employed individuals, freelancers, and small business owners.
- Potential savings: Varies based on expenses and income.
11. Job Search Expenses
If you’re looking for a job in your current occupation, you might be able to deduct certain expenses.
- How it works: You can deduct expenses like resume preparation, travel for interviews, and employment agency fees.
- Who can claim it: Job seekers looking for work in their current occupation.
- Potential savings: Varies based on expenses.
12. Jury Duty Pay Given to Employer
If you had to give your jury duty pay to your employer, you can deduct that amount.
- How it works: If your employer paid you while you were on jury duty and required you to turn over your jury duty pay, you can deduct that amount.
- Who can claim it: Employees who turned over jury duty pay to their employer.
- Potential savings: Varies based on jury duty pay amount.
13. Energy-Efficient Home Improvements
You might be eligible for a credit if you made certain energy-efficient improvements to your home.
- How it works: You can claim a credit for a percentage of the cost of qualified energy-efficient improvements.
- Who can claim it: Homeowners who made qualifying energy-efficient improvements.
- Potential savings: Up to $500 lifetime limit for most improvements.
14. State Tax Paid on a Major Purchase
If you made a major purchase like a car or boat, you might be able to deduct the sales tax.
- How it works: You can add the sales tax from major purchases to your standard sales tax deduction.
- Who can claim it: Anyone who chooses to deduct sales tax instead of income tax.
- Potential savings: Varies based on purchase price and local tax rates.
15. Mortgage Points
If you bought a home or refinanced your mortgage, you might be able to deduct points paid.
- How it works: Points paid to lower your interest rate are generally deductible over the life of the loan.
- Who can claim it: Homeowners who paid points on a mortgage.
- Potential savings: Varies based on points paid and loan terms.
16. Gambling Losses
If you had gambling winnings, you can deduct your losses up to the amount of your winnings.
- How it works: You must report all gambling winnings as taxable income, but you can deduct your losses up to that amount.
- Who can claim it: Individuals who report gambling income and have losses.
- Potential savings: Varies based on winnings and losses.
17. Educator Expenses
Teachers and other educators can deduct unreimbursed expenses for classroom supplies.
- How it works: You can deduct up to $250 for unreimbursed expenses.
- Who can claim it: K-12 teachers, counselors, principals, and aides who work at least 900 hours per school year.
- Potential savings: Up to $250 in deductions.
18. Reinvested Dividends
If you have mutual funds that automatically reinvest dividends, you might be able to add those reinvestments to your cost basis.
- How it works: Adding reinvested dividends to your cost basis can reduce your capital gains when you sell the shares.
- Who can claim it: Investors with mutual funds that automatically reinvest dividends.
- Potential savings: Varies based on investment performance and tax bracket.
Takeaways
Understanding and claiming these often-overlooked tax deductions can potentially save you significant money on your taxes. However, tax laws are complex and change frequently. It’s crucial to keep accurate records and consult with a tax professional or use reliable tax software to ensure you’re claiming all the deductions you’re entitled to while staying compliant with tax laws.
Remember, everyone’s tax situation is unique. What works for one person may not apply to another. By staying informed about potential deductions and keeping good records throughout the year, you can maximize your tax savings and keep more of your hard-earned money.
