In all the complexity of tax preparation, it is easy to miss a deduction or credit. This is a particular advantage to utilizing a professional tax service, because they ask all the questions you may otherwise overlook. Here is a look at some of the most commonly missed deductions and credits.
20 Most Commonly Missed Deductions and Credits
Many taxpayers miss out on several deductions that could save them significant amounts of money. Here’s a list of twenty of the most commonly overlooked tax deductions:
1. State Sales Tax
- Taxpayers can deduct either state income tax or state sales tax on their federal return, but not both. In states with no income tax, this deduction can be valuable. Keep receipts for major purchases like vehicles, boats, or home renovation materials to maximize this deduction.
2. Charitable Contributions
- Many taxpayers forget to include smaller charitable contributions or non-cash donations. Even mileage driven for charitable purposes can be deducted (14 cents per mile).
- Non-cash items like clothing, furniture, and electronics are often overlooked, but can also be deducted if donated to qualified organizations.
3. Medical Expenses
- If unreimbursed medical expenses exceed 7.5% of your adjusted gross income (AGI), they can be deducted. This can include prescription drugs, medical travel, home modifications for medical reasons, and even medical equipment.
- Long-term care insurance premiums are also deductible under certain limits based on age.
4. Student Loan Interest Paid by Parents
- If parents pay off a child’s student loan, the IRS treats it as if the child paid the loan. That means the child may be eligible for up to $2,500 in student loan interest deduction, even if someone else (like a parent) paid it.
5. Educator Expenses
- Teachers, counselors, and instructors in K-12 schools can deduct up to $300 for classroom supplies and professional development costs. If both spouses are educators, the deduction doubles to $600.
6. Earned Income Tax Credit (EITC)
- Many low to moderate-income taxpayers miss out on this credit because they either don’t know about it or don’t think they qualify. Even those without children may qualify for the EITC if their income is low enough.
7. Job Search Expenses
- Job search expenses in a current occupation, including resume preparation, career coaching, and travel for interviews, may be deductible if they exceed 2% of your AGI. This was suspended under the Tax Cuts and Jobs Act of 2017, but could still apply for certain years before 2018.
8. Mortgage Points
- If you’ve paid points to reduce the interest rate on your mortgage, you may deduct them in the year they were paid if the mortgage was for your primary residence. Points paid on a refinance can be deducted over the life of the loan.
9. State and Local Property Taxes
- Homeowners can deduct up to $10,000 of state and local property taxes under the State and Local Taxes (SALT) deduction. Many homeowners fail to claim this deduction or may miss qualifying for the maximum.
10. Self-Employment Deductions
- Self-employed individuals can deduct business expenses such as home office space, internet/phone use, business insurance, professional development, and retirement plan contributions. The home office deduction is often missed due to fears of an audit, but it’s legitimate if used correctly.
11. Energy-Efficient Home Improvements
- Taxpayers who make certain energy-efficient home improvements, like installing solar panels, energy-efficient windows, or heating systems, can qualify for energy tax credits. These credits may be available at both the federal and state levels.
12. Moving Expenses for Military
- Active-duty military members who move due to a military order can deduct unreimbursed moving expenses, such as travel costs and shipping belongings, even though this deduction was eliminated for most taxpayers under the 2017 tax reforms.
13. Dependent Care Credit
- If you pay for child care while you work or look for work, you may be eligible for a tax credit. This includes daycares, nannies, and even day camps (though overnight camps don’t count). Many people mistakenly assume they make too much to qualify, but the income limit is relatively high.
14. Home Office Deductions for Remote Workers
- Though employees working from home generally cannot deduct home office expenses (as of the 2017 tax reform), self-employed individuals or contractors still can, provided their home office is used regularly and exclusively for business.
15. Retirement Savings Contributions Credit
- Low and moderate-income taxpayers can qualify for the Retirement Savings Contributions Credit (Saver’s Credit) for contributions to IRAs, 401(k)s, or similar retirement plans. Many eligible taxpayers overlook this credit, which can offset some of the savings from retirement plan contributions.
16. Health Savings Account (HSA) Contributions
- If you contribute to a Health Savings Account (HSA) and have a high-deductible health plan, you may be able to deduct contributions made by you (or someone other than your employer) to your HSA, even if you do not itemize.
17. Casualty and Theft Losses
- If you’ve experienced a casualty or theft loss in a federally declared disaster area, you may be able to deduct a portion of your losses. This deduction is less common, but when applicable, it can be quite valuable.
18. Jury Duty Pay Given to Employer
- If your employer continues to pay your full salary while you’re serving on a jury, but you must turn over your jury duty pay to your employer, you can deduct the amount of jury duty pay you gave back.
19. Alimony Payments
- For divorces finalized before 2019, alimony payments can be deducted by the payer. This deduction was eliminated for divorces or separations executed after December 31, 2018.
20. Reinvested Dividends
- When dividends are reinvested in more shares of a stock or mutual fund, they increase your tax basis, which can reduce your taxable capital gain when you sell the investment. Many taxpayers forget to adjust the basis for reinvested dividends, paying more in taxes than necessary.
By being aware of these commonly missed deductions, taxpayers can potentially reduce their tax liability and maximize their refund. It’s always a good idea to consult with a tax professional to ensure you’re not leaving money on the table.
Each of these reasons is motivation to seek professional tax preparation. Particularly, tax software that prompts you to enter information is the most useful in catching all of the extra, easily overlooked deductions and credits. Check some valuable Tax Filing Preparation Providers that can help in preparing and filing your personal tax return.