Tax season is a time most everyone dreads, but are you missing out on potential savings unknowingly? Check out the 11 most overlooked tax deductions to see if you are.
1. Out-of-Pocket Charitable Deduction
Charitable donations are a great write-off, but there is a portion within them that tends to get overlooked. You can write off out-of-pocket costs that you incur while doing work for charities. Not sure what that means? Here are a few examples:
Cost of ingredients used for meals prepared
Stamps purchased for a school fundraiser
Driving for charity can be deducted at $0.14/mile, plus parking and tolls
Hang onto all of your receipts for tax time. Also, be aware that if your contributions exceed $250, you’ll need an acknowledgment from the charity.
2. State Sales Tax
Pay close attention if you live in a state without a state income tax. You have the option to deduct the state income taxes or state and local sales taxes you have paid. Opt for the deduction for more significant savings. Use this IRS calculator to help you see how much you can deduct.
The one downside is that this write-off is added to your local property tax with a $10,000 maximum per year for both ($5,000 married, filing separately).
3. Gambling Loss
Yes, you can write off your gambling losses, but only if you itemize. It is also limited based on the number of gambling winnings you report and your taxable income. Here are a few of the gambling losses people overlook:
Non-winning lotto tickets
Non-winning raffle tickets
As always, if you’re going to claim gambling losses, keep all of your receipts. It’s also recommended you keep a gambling activity diary for even better records.
4. Previous Year’s State Tax
If you owed state taxes after filing for the previous year, be sure to include that in your state-tax deduction on your federal tax return of the current year. Remember, these deductions are limited to $10,000 per year ($5,000 married, filing separately).
5. Child Care Credit
While not technically a deduction, a credit is better, tax bill dollar for dollar. If you pay for childcare while working, you can qualify for a tax credit anywhere in the range from 20% to 35%.
Some employers offer a childcare reimbursement account, where you can pay for your childcare with pretax dollars. Make sure to weigh out the benefits of both, as you are not able to double-dip.
For example, if you qualify for a 20% child care credit, but you fall in the 24% tax bracket, your employer reimbursement plan will likely be more beneficial to you. Note that if your expenses exceed your employers’ account, you can still claim up to $1,000 per year in additional costs through the child care credit.
6. Dependents Credit
If you have children, you are familiar with the $2,000 child tax credit for children under 16 years old. But, did you know that you can qualify for credit for older children as well? You can receive a $500 tax credit for dependents who do not qualify for the child tax credit. Check out the IRS website for more details.
It’s important to note that the total combined credit between children and other dependents phases out if your adjusted gross income exceeds $200,000 ($400,000 married, filing jointly).
Although not a deduction or a credit, reinvested dividends are another potential saving opportunity for taxes. If you have automatically reinvested mutual fund dividends, don’t forget that each new purchase you make will increase your tax basis in that fund, which will reduce the taxable capital gain when you redeem.
When you forget to include your reinvested dividends, you end up with double taxation of your dividends, once when they were paid and later when they are in the sale proceeds.
8. Social Security Tax
If you are self-employed and paying the 15.3% tax for Social Security and Medicare yourself, you can write off half of what you spend in the year. What’s even better, you don’t even have to itemize this to reap the benefits of this deduction.
9. Refinancing Points
When you refinance your home, you can deduct the points paid on your new mortgage over the loan’s life. For example, you can deduct 1/30th of the points each year over a 30-year loan, or $33 per year for each $1,000 point paid.
If you refinanced and used part of that loan for home improvements, you might be able to deduct any points that are related right away.
10. Private School Tuition (K-12)
If your kids attend religious or other private schools in grades kindergarten through 12, you can take a tax-free distribution from a 529 savings plan of up to $10,000 per student per year. While you can pay their tuition from several 529 plan accounts, the total amount cannot exceed the annual limit.
Outside of college credits is the Lifetime Learning credit, which you can use over as many years as qualified for yourself, your spouse, or your children. This credit is worth as much as $2,000 per year based on a 20% credit for up to $10,000 per year. Check here to see if you qualify.
Qualifying expenses for the Lifetime Learning credit include:
Post-high school classes for new or improved job skills
Classes attended in retirement
Community college courses
For 2020 taxes, this credit phases out for incomes exceeding $69,000 for individuals ($138,000 married, filing jointly). Then, in 2021, the credit phases out for incomes exceeding $80,000 for individuals ($160,000 married, filing jointly).
You have enough to worry about come tax season, don’t let overpaying add to your list. With this list of the most overlooked tax deductions, hopefully, you’ll find ways to save for years to come.