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Top Missed Tax Deductions: Don’t Leave Money on the Table

Top Missed Tax Deductions
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Tax time is always stressful for hardworking Americans. Every year, countless individuals and businesses miss out on valuable tax deductions, essentially leaving money on the table. Whether you’re a freelancer, a small business owner, or managing your household’s finances, this guide will help you uncover some of the most commonly missed opportunities to reduce your taxable income and increase your potential refund.

There are always many moving parts to keep track of when it comes time for tax preparation. However, with finances tight for many families across the country, ensuring all bases are covered is especially important this year. With this in mind, there may be overlooked tax deductions that can save you thousands.

Work-Related Deductions You Might Be Missing

Home Office Deduction

In the era of remote work, the deduction for a home office is more relevant than ever. If you use part of your home regularly and exclusively for business, you may be able to deduct expenses such as mortgage interest, insurance, utilities, repairs, and depreciation. However, the IRS has strict guidelines on what constitutes a “home office,” so it’s essential to ensure your space qualifies.

Educational Expenses

Many are unaware that job-related education expenses can be deductible. If you’re taking courses or attending seminars to improve your skills in your current job or as required by your employer, these expenses might be deductible. However, this does not apply if the education qualifies you for a new trade or profession.

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Travel and Mileage

If you travel for work outside your regular office, those expenses can add up and are often deductible. This includes airfare, hotels, meals, and even the standard mileage rate for using your car. Remember to keep detailed records of your travel expenses to substantiate your deductions.

Tax Deductions Related to Family

Many of the tax breaks associated with family situations are actually credits rather than deductions. Nonetheless, they can save your family quite a bit during tax time.

Child and Dependent Care Credit

With this credit, up to $6,000 in childcare expenses can qualify. But, it’s important to note that funds from a tax-favored reimbursement account at work do not qualify.

The percentage of the credit depends on your household income, rising as income lowers. This tax credit can be anywhere between 20 percent to 35 percent of the amount you pay in childcare costs.

Adoption Credit

Most taxpayers are aware of the child tax credit. This covers up to $2,000 per kid and $500 per non-child dependent. In addition, there is tax relief associated with the costs of adopting a child.

For the 2020 tax year, this covers adoption costs of up to $14,300 per child. It can also include adopting your spouse’s child. If you adopt a special-needs child, you may be able to get the full credit even if your actual expenses were lower.

However, these funds have limits. If your AGI is higher than $214,520, this credit begins to phase out. If your AGI exceeds $254,520, you are ineligible.

Earned Income Tax Credit

While the EITC may seem like a popular tax credit, nearly a quarter of eligible taxpayers do not claim it. Again, this is a credit rather than a deduction—but if you qualify, it can save you big time on your taxes.

The EITC’s goal is to support lower and middle-class families that might be struggling to make ends meet. It is generally worth looking into if your adjusted gross income (AGI) was less than $57,000.

The maximum EITC depends on your filing status but ranges from $538 to $6,660 for 2020.

Health-Related Deductions That Often Go Overlooked

It’s no secret that healthcare in the United States can grow very costly. While health insurance can help reduce these costs, there are often further costs that go unreimbursed.  Luckily, there are a few options for tax deductions that can help recover some of these costs.

Health Savings Account (HSA) Contributions

HSAs offer triple tax advantages: contributions are tax-deductible, the money grows tax-free, and withdrawals used for qualified medical expenses are also tax-free. Maximizing your HSA contributions can offer significant tax savings.

For 2023, the maximum individual contribution limit is $3,850, and for families, it is $7,850. However, those over 55 can contribute an extra $1,000. Each HSA has its own policies and requirements.

Medical and Dental Expenses

You might be able to deduct out-of-pocket medical and dental expenses exceeding 7.5% of your adjusted gross income. This includes payments for doctors, surgeries, prescription medications, and other health-related expenses not covered by insurance.

You can generally deduct qualified and unreimbursed medical expenses when they exceed seven-and-a-half percent of your AGI for the year. These are costs that can arise for various reasons, such as a car accident or natural disaster.

These expenses could be many factors, including:

  • Payments to medical practitioners
  • Hospital and home nursing care
  • Acupuncture
  • Addiction programs
  • Weight-loss programs for doctor-diagnosed diseases
  • Insulin
  • Prescription drugs
  • Admission and transportation to medical conferences pertaining to diseases present in your immediate family (does not include meals or lodging)
  • Dentures
  • Reading or prescription eyeglasses and contacts
  • Hearing aids
  • Crutches and wheelchairs
  • Service animals
  • Transportation to and from medical care

There are other eligible expenses as identified by the IRS, as well. But it’s important to note you may only include expenses paid within the tax year you are filing for.

You also cannot include expenses reimbursed by insurance, your employer, or other entities.

Generosity That Gives Back

Charitable Donations

Charitable contributions, both cash and non-cash, can be deductible. If you’ve donated to a qualified organization, ensure you’ve kept good records of your donations, as they can reduce your taxable income. Even out-of-pocket expenses incurred while volunteering can be deductible.

Tax Deductions Related to Your Home

Any homeowner can tell you that there are many costs, both recurring and unforeseen, associated with homeownership each year. Luckily, several tax deductions can help recover some expenses from the previous year.

Mortgage Insurance Premiums

Some homeowners are required to purchase private mortgage insurance (PMI). This is most common in loans originating after 2006, in which the down payment was less than 20 percent.

If you itemize deducting, you can subtract your PMI premiums. This would be done online 8D of Schedule A (Form 1040).

If your adjusted gross income is over $100,000, this deduction begins to phase out. If your AGI is greater than $109,000—it disappears altogether.

While this deduction is technically set to expire after the 2022 tax year, it has been extended various times and likely could be repeated. It’s also important to underscore the difference between PMI and homeowners insurance.

Home Office

After the onset of the COVID-19 pandemic, many Americans began working completely from home. If you foresee this becoming a permanent fixture, you may be able to write off part of your home if it is used regularly and exclusively for business activities.

This may include some or all costs for your principal place of business, including your:

  • Rent
  • Mortgage
  • Real estate taxes
  • Repairs
  • Maintenance
  • Other related expenses

This deduction applies whether you are a homeowner or a renter, and it does not matter what type of housing you have—a single-family home, apartment, condo, or freestanding structure. However, it cannot apply to a hotel or temporary lodging.

There are two methods to put this into action.

The simplified method requires measuring your business space. Then, it is multiplied by a rate of $5 per square foot, up to 300 square feet of workspace.

On the other hand, the more difficult method involves calculating the value of your home office. This is done by measuring actual expenses against overall residential expenses. With this method, you can deduct other expenses like mortgage interest, taxes, maintenance and repairs, and home insurance.

Residential Energy

While it comes in the form of credit rather than a deduction, some energy systems can earn you money back on your tax bill. This can cover up to 26 percent of the installation cost of solar energy systems.

This goes beyond just solar panels—solar water heaters and other systems are also included.

Top 20 Most Overlooked Tax Deductions
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Tax Deductions Related to Other Taxes Paid

In unique situations, the cost of some taxes themselves is deductible. Though more uncommon, consider the following scenarios that could save you money this tax year.

State Sales Taxes

Americans must choose between deducting their state and local income taxes and their state and local sales taxes. For most Americans, the former tends to be the more financially sound option.

But, there are a handful of states that do not levy state income tax on their residents. These are:

  • Alaska
  • Florida
  • Nevada
  • New Hampshire
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

Residents of these nine states should instead claim the sales tax deduction on their federal tax return. There are two separate methods for doing this.

The first is to use the IRS tables that correspond to your state. These will help you determine what you can deduct. You can also include sales tax on large purchases.

This might include sales taxes paid for a vehicle, boat, airplane, house, or large home renovations. In these cases, you may be able to deduct the cost of in-state sales tax, which is separate from the amount found in the IRS table for your state.

The other option is to carefully track all state sales tax paid throughout the year and use this information for your tax return.

Overall, the IRS limits the total of itemized deductions related to state and local taxes to $10,000 annually.

Social Security Tax

This deduction only applies to self-employed workers.

In traditional employment arrangements, the employee and the employer split Social Security and Medicare taxes. However, self-employed workers would otherwise be left paying the full 15.3% tax themselves.

Instead, self-employed workers can write off half of what they pay in social security taxes. Plus—this deduction is available even if you do not itemize your deductions.

Tax Deductions Related to Government Obligations

There are several government obligations that may take us away from our normal routine. In particular, military activities and jury duty are two of the most time-consuming obligations that can prove costly in various ways. To help remedy this, there are various tax deductions for some of these situations.

Moving Expenses for Military Personnel

Important tax deductions are available for active-duty military personnel who are moving permanently due to military orders. This includes the costs associated with relocating themselves and their families.

Examples of eligible expenses include:

  • Travel and lodging fees
  • Costs to move household goods
  • Costs to ship cars
  • Fees to transport pets
  • Storage expenses

There are further, more specific requirements that are worth looking into for those who qualify.

Travel Expenses for Military Reservists

This deduction applies to members of the National Guard or military reserves for the costs incurred as they travel to drills or other meetings. It covers travel over 100 miles from home, and reservists must be away from home overnight.

The deduction covers:

  • Costs of lodging
  • Half the cost of meals
  • Allowance for driving your car to and from drills (2020 rate is 57.5 cents per mile)
  • Costs of parking and tolls

Plus, this deduction is available to taxpayers even if you do not itemize your deductions.

Jury Duty

This deduction applies to some employees who must take time off work for civic duty. Some companies pay their workers their full salary while they serve on juries. In return, these employers expect their employees to turn over their jury fees to their company.

At the same time, the IRS considers this taxable income. In these situations, it’s unfair to leave the tax burden on the employee who simply served as the middleman for these funds.

This is where the deduction for jury pay paid to the employer comes into play.

Tax Deductions Related to Education

When it comes to education, the list of costs is seemingly endless. This includes kindergarten, college, and even professional degrees.

With this in mind, all taxpayers who attended school or college in 2023 (or whose children attended) must review the following deductions carefully.

Interest Paid on Student Loans

There is a relatively new exception to the rules about deducting interest paid on student loans. In the past, nobody benefited from taxes on interest paid on a student loan unless they both incurred the debt and paid it themselves.

The IRS currently allows the interest paid on these education loans to be deducted by the students themselves, even if someone else paid the interest. In essence, treat it as if someone else gave you the money to pay the debt directly.

Overall, students can deduct up to $2,500 of interest paid on loans.

K-12 Private School Tuition

Tuition for private elementary, middle, and high schools can become very expensive. Luckily, there is a tax incentive associated with these costs.

Many parents with school-aged kids have heard of 529 savings plans. These are tax-advantaged accounts, with funds solely for educational purposes.

Parents with children in private schools can elect to take a tax-free distribution of up to $10,000 per student per year from a 529 savings plan. These funds can be used to pay tuition for religious or other private schools from kindergarten through 12th grade.

Though this money can come from more than one 529 plan account, it cannot exceed the aforementioned yearly limit.

American Opportunity Credit

Again, this is a tax credit rather than a deduction. But, this option provides serious savings to families with college students.

The American Opportunity Credit taxes 100 percent of the first $2,000 spent on qualifying college expenses. 25 percent of the next $2,000 of expenses is also included. Together, you may be eligible for a maximum yearly credit of $2,500 per student.

The actual credit depends on your adjusted gross income.

Lifetime Learning Credit

For those who go back to school later in life, there is a tax credit that may help. Again, the Lifetime Learning Credit, a credit rather than a deduction, helps offset the costs of college, up to $2,000 per year.

This covers all kinds of continuing education, including:

  • Undergraduate degree courses
  • Graduate degree courses
  • Professional degree courses
  • Vocational school courses
  • Community college courses
  • Courses to acquire or improve job skills

As with many other tax credits, it phases out with higher income. But, there is no limit to the number of years you may claim the Lifetime Learning Credit.

Tax Deductions that are often missed

Other Overlooked Tax Deductions

In addition to the above-mentioned categories, there are various miscellaneous overlooked tax deductions. Read on below to ensure you don’t miss out on reducing your 2020 taxable income.

Reinvested Dividends

While this one is not technically a tax deduction, it is an important area to subtract that many Americans overlook. This applies to the many investors who receive mutual fund dividends that are then automatically reinvested.

In these cases, these reinvestments increase your “tax basis” in the stock or mutual fund, reducing the amount of taxable capital gain you receive when you sell shares.

If you forget to subtract this amount, you will ultimately overpay on your capital gains tax.

Gambling Losses

For those who dabbled in gambling in 2023, you may be able to deduct associated losses from your tax liability. However, the amount you can deduct is limited to the amount of winnings you report as taxable income, as well.

These costs can include losses at the following:

  • Casino
  • Racetrack
  • Bingo
  • Lottery
  • Raffle tickets

Other situations can apply, as well. To claim this deduction, you must hold on to your gambling receipts or losing tickets. It may also help keep a gambling diary with the time, date, location, amount won or lost, and gambling type.

It’s important to note that this deduction is only available to taxpayers who itemize their deductions—rather than those who choose the standard deduction.

Out-of-Pocket Costs for Charitable Acts

Donating to charity makes us all feel good afterward. This feeling continues, as you can deduct many expenses related to the charitable work or donations you engaged in last year.

This deduction focuses on the smaller costs you incur as you engage in charitable activities. This might include the costs of ingredients to donate a meal to a nonprofit soup kitchen. Or, it may be for the cost of stamps used in a school fundraiser.

Even the tolls paid and miles driven in your car for charitable deeds can be included in this category at a rate of 14 cents per mile. Many of these related costs can be deducted from your tax bill—just be sure to hang on to your receipts.

Conclusion: A Final Word of Advice

Taxes can be complex, and the opportunities for deductions are vast and varied. This guide has highlighted some of the most commonly missed deductions, but it’s far from exhaustive. Tax laws change, and individual circumstances differ, so it’s crucial to consult with a tax professional to ensure you’re not missing out on any deductions or credits applicable to your situation.

At LoPriore Insurance Agency, we’re committed to helping you navigate the complexities of financial planning, including maximizing your tax deductions. Don’t let these opportunities pass you by. Take control of your finances and ensure you’re making the most of the tax benefits available to you.

If you found this guide helpful, subscribe for more tips and insights on managing your finances effectively. Remember, a little knowledge goes a long way toward maximizing your tax deductions and keeping more money in your pocket.

Frequently Asked Questions

Of course, you should direct more complex questions to your tax professional. But here are some of the most commonly asked questions about overlooked tax deductions.

What Is the Difference Between a Tax Deduction and a Tax Credit?

A tax credit reduces your tax burden dollar for dollar. Some credits are refundable, meaning that excess funds are passed back to you. But most are non-refundable, meaning that they can reduce the amount you owe, but anything in excess does not result in a tax refund.

On the other hand, a tax deduction reduces the amount of income you are eligible to be taxed on. This can reduce your tax bracket and ultimately help reduce your tax obligation for the previous year.

What Is the Difference Between Itemizing and the Standard Deduction?

Itemizing deductions involves adding up each individual deduction that you qualify for. Each deduction reduces your income, making you eligible for tax. However, this method requires more time, effort, and organization.

In turn, the standard deduction is a flat-dollar amount that reduces your adjusted gross income. The amount depends on your filing status.

Luckily, this sum has increased significantly in recent years. For many taxpayers, this is now the more beneficial option.

For 2023, a single filer would get a standard deduction of $13,850. At the top of the list, a head of household would reach $27,700.

How Do I Get the Biggest Refund?

Each tax situation is different, so there is no blanket answer for finding the biggest refund. However, for more simple tax situations (like single filers with one job and uncomplicated assets), online tax filing systems may be a good option.

Many free or low-cost products are available, many of which offer live tax advice at the click of a button.

For more complicated tax situations, it may be best to seek the services of a qualified tax professional, such as an accountant or other tax preparer. They will be well-versed in tax law and can potentially find hidden or oft-overlooked tax deductions and credits.

But be sure to research these services before fully committing to one. When you select a tax professional, try to remain as organized as possible when submitting the appropriate documents.

Locating Overlooked Tax Deductions

Especially after such a tumultuous year, tax situations may be more complicated than usual.

It’s best to ensure that all of your bases are covered and that no tax deductions or credits are overlooked. For more information, speak with your accountant or tax preparer.

You may be more aware now than ever of important financial areas that are not up to par. Your insurance policy should be effective while affordable.

For help with various types of insurance in Massachusetts, consult with a respected agent who can find the right coverage for your needs and budget.

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