Most Commonly Overlooked Tax Deductions
Many people we work with do their own taxes. This can be beneficial if your tax situation isn't complicated, as it saves money and allows you to file your returns when you want to without having to wait for a busy tax preparer to complete your return.
If you do your taxes yourself, you want to make sure you're taking every deduction you're entitled to. To help out with that, I want to share a list from Turbo Tax of the most overlooked deductions. This is only a high-level overview, and there are limits to some of these items, so refer to the original article for the applicable rules and links to helpful IRS tools and tables.
- State sales tax. If your state does not have an income tax, you can deduct the amount you pay in state sales taxes. If your state does have an income tax, you can choose between deducting your state and local income tax or your sales tax. Deducting income tax is usually the way to go in states with an income tax, but for a retiree who doesn't have income, sales tax may be the better option, especially if you purchased any big-ticket items, like vehicles or boats.
- Dividends. If you own mutual funds and you are reinvesting dividends, those go toward the cost basis of your holdings. If you have a financial advisor handling such investments, they are keeping up with it for you, but if you handle your own portfolio, you must remember that if you don't include reinvested dividends in your cost basis, it will make your gain higher and result in higher capital gains tax.
- Out of pocket charitable contributions. It's easy to keep up with checks your write to your church or payroll deductions that go to United Way, but don't overlook little things you do throughout the year. Things like food you give to soup kitchens or stamps you buy for a school fundraiser are deductible. They may be small, but they can really add up over the course of a year.
- Student loan interest paid by your parents. It used to be that if you, as a student, were the debtor, but your parents incurred the debt, neither of you could write off the interest because IRS regulations said you had to be both liable for the debt and making the payments to deduct the interest. Regulations have changed so that if the parents pay back the loan, the IRS looks at it as though they gave the money to the child, and the child paid the debt. If the child is not listed as a dependent on the parents' tax return, they may qualify to write off up to $2,500 in student loan interest, depending on adjusted gross income.
- Moving expenses to take your first job. Job hunting expenses are not deductible, but moving expenses to get to the first job are. Even if you take a standard deduction and don't itemize on your tax returns, you can take this deduction for moving expenses you pay. The deduction doesn't apply for moving expenses paid by your new employer. If you move more than 50 miles from your new location, you can deduct 20 cents per mile for moving you and your belongings in your personal vehicle. You can also write off parking fees, and road tolls paid while moving.
- Child and dependent care tax credits. Tax credits are more valuable than deductions because a credit is a dollar-for-dollar reduction in your tax liability. If you have a tax-favored reimbursement account through your employer, you can use it to pay up to $5,000 in dependent care expenses. If you spend more than that, you can take an additional $1,000, for a total of $6,000 in expenses that can qualify for credits.
- Earned income tax credit. This is designed to supplement wages for low-income families, and many people who don't typically fit into that category don't realize they can be considered "low-income" for a certain tax year if they take a pay cut, lose their job, or work fewer hours.
- State tax you paid last spring. If you owed taxes for 2015 when you filed your state return in 2016, you can deduct the amount you paid from your federal income tax for 2016.
- Refinancing mortgage points. When you buy a house, you can deduct the points you pay all at one time. If you refinance, you have to deduct the points over the life of the loan. So for a 30-year mortgage, you would deduct 1/30th of the points you paid at closing every year. If you sell the house and pay off the mortgage, you can deduct all the remaining un-deducted points. You can do this if you pay off a mortgage by refinancing, too, as long as you don't refinance with the same lender.
- Jury pay paid to an employer. Jurors get paid a very small amount, but are required by the IRS to report this income. Some employers require employees who serve jury duty to sign that check over to them. If this happens, you can deduct the amount of your jury pay since the money only passed through your hands.
Some of these deductions are admittedly small, but they can add up to more significant tax savings if you take advantage of them all. Make sure you understand what the regulations mean for your situation and consult a qualified tax professional if you have any questions.
-Jay McGowan-