The 10 Most Overlooked Tax Deductions
Don’t overpay taxes by overlooking these tax deductions. See the 10 most common deductions taxpayers miss on their tax returns so you can keep more money in your pocket.
Get your share of more than $1 trillion in tax deductions
The most recent numbers show that more than 45 million of us itemized deductions on our 1040s—claiming $1.2 trillion dollars’ worth of tax deductions. That’s right: $1,200,000,000,000! That same year, taxpayers who claimed the standard deduction accounted for $747 billion. Some of those who took the easy way out probably shortchanged themselves. (If you turned age 65 in 2018, remember that you deserve a bigger standard deduction than younger folks.)
Here are our 10 most overlooked tax deductions. Claim them if you deserve them, and keep more money in your pocket.
1. State sales taxes
This write-off makes sense primarily for those who live in states that do not impose an income tax. You must choose between deducting state and local income taxes, or state and local sales taxes. For most citizens of income-tax-states, the income tax deduction usually is a better deal. IRS has tables for residents of states with sales taxes showing how much they can deduct. But the tables aren’t the last word.
If you purchased a vehicle, boat or airplane, you get to add the state sales tax you paid to the amount shown in IRS tables for your state, to the extent the sales tax rate you paid doesn’t exceed the state’s general sales tax rate. The same goes for home building materials you purchased. These items are easy to overlook. The IRS even has a calculator to help you figure out the deduction, which varies by your state and income level.
Beginning in 2018, your itemized deduction for state and local taxes is limited to $10,000 per year. You still will only be allowed to deduct either state and local sales tax or state and local income taxes, but not both.
2. Reinvested dividends
This isn’t really a tax deduction, but it is a subtraction that can save you a lot of money. And it’s one that many taxpayers miss. If, like most investors, you have mutual fund dividends automatically invested in extra shares, remember that each reinvestment increases your “tax basis” in the stock or mutual fund. That, in turn, reduces the amount of taxable capital gain (or increases the tax-saving loss) when you sell your shares.
Forgetting to include the reinvested dividends in your cost basis—which you subtract from the proceeds of the sale to determine your gain—means overpaying your taxes.
Premier and Home & Business tax preparation solutions include a very cool tool—Cost Basis Lookup—that will figure your basis for you and make sure you get credit for every dime of reinvested dividends.
3. Out-of-pocket charitable contributions
It’s hard to overlook the big charitable gifts you made during the year by check or payroll deduction. But the little things add up, too, and you can write off out-of-pocket costs you incur while doing good deeds. Ingredients for casseroles you regularly prepare for a qualified nonprofit organization’s soup kitchen, for example, or the cost of stamps you buy for your school’s fundraiser count as a charitable contribution. If you drove your car for charity in 2019, remember to deduct 14 cents per mile.
4. Student loan interest paid by you or someone else
In the past, if parents or someone else paid back a student loan incurred by a student, no one got a tax break. To get a deduction, the law said that you had to be both liable for the debt and actually pay it yourself. But now there’s an exception. You may know that you might be eligible to take a deduction but even if someone else pays back the loan, the IRS treats it as though they gave you the money, and you then paid the debt. So, a student who’s not claimed as a dependent can qualify to deduct up to $2,500 of student loan interest paid by you or by someone else.
5. Moving expense to take the first job
Here’s an interesting dichotomy: Job-hunting expenses incurred while looking for your first job are not deductible, but moving expenses to get to that first job are. And you get this write-off even if you don’t itemize. If you moved more than 50 miles, you can deduct 23 cents per mile of the cost of getting yourself and your household goods to the new area, (plus parking fees and tolls) for driving your own vehicle. However, beginning in 2018, moving expenses are no longer deductible for federal taxes unless you are in the military and the move is due to military orders. Some states such as California continue to provide this tax benefit.
6. Child and Dependent Care Tax Credit
A tax credit is so much better than a tax deduction—it reduces your tax bill dollar for dollar. So missing one is even more painful than missing a deduction that simply reduces the amount of income that’s subject to tax.
But it’s easy to overlook the child and dependent care credit if you pay your childcare bills through a reimbursement account at work. The law allows you to run up to $5,000 of such expenses through a tax-favored reimbursement account at work.
Up to $6,000 in care expenses can qualify for the credit, but the $5,000 from a tax-favored account can’t be used. So if you run the maximum $5,000 through a plan at work but spend more for work-related childcare, you can claim the credit on up to an extra $1,000. That would cut your tax bill by at least $200 using the minimum 20 percent of the expenses. The credit percentage goes up for lower-income households.
7. Earned Income Tax Credit (EITC)
Millions of lower-income people take this credit every year. However, 25% of taxpayers who are eligible for the Earned Income Tax Credit fail to claim it, according to the IRS. Some people miss out on the credit because the rules can be complicated. Others simply aren’t aware that they qualify.
The EITC is a refundable tax credit—not a deduction—ranging from $529 to $6,557 for 2019. The credit is designed to supplement wages for low-to-moderate-income workers. But the credit doesn’t just apply to lower-income people. Tens of millions of individuals and families previously classified as “middle class”—including many white-collar workers—are now considered “low income” because they:
- lost a job
- took a pay cut
- or worked fewer hours during the year
The exact refund you receive depends on your income, marital status, and family size. To get a refund from the EITC you must file a tax return, even if you don’t owe any taxes. Moreover, if you were eligible to claim the credit in the past but didn’t, you can file any time during the year to claim an EITC refund for up to three previous tax years.
8. State tax you paid last spring
Did you owe taxes when you filed your 2018 state tax return in 2019? Then remember to include that amount with your state tax itemized deduction on your 2019 return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments. Beginning in 2018, the deduction for state and local taxes is limited to $10,000 per year.
9. Refinancing mortgage points
When you buy a house, you often get to deduct points paid to obtain your mortgage all at one time. When you refinance a mortgage, however, you have to deduct the points over the life of the loan. That means you can deduct 1/30th of the points a year if it’s a 30-year mortgage—that’s $33 a year for each $1,000 of points you paid. Doesn’t seem like much, but why throw it away?
Also, in the year you pay off the loan—because you sell the house or refinance again—you get to deduct all the points not yet deducted unless you refinance with the same lender.
10. Jury pay paid to the employer
Some employers continue to pay employees’ full salary while they are doing their civic duty, but ask that they turn over their jury fees to the company. The only problem is that the IRS demands that you report those fees as taxable income. If you give the money to your employer you have a right to deduct the amount so you aren’t taxed on money that simply passes through your hands.
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