Tax time is always stressful for hardworking Americans. Especially after such a tumultuous year, they are even more complicated this year.
There are always many moving parts to keep track of when it comes time for tax preparation. But 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.
For 20 of the most commonly missed tax deductions for your 2022 tax bill, read on below.
Tax Deductions Related to Family
Many of the tax breaks associated with family situations are actually credits rather than deductions. But none the less, they can save your family quite a bit at tax time.
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1. Child and Dependent Care Credit
With this credit, up to $6,000 in child care 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.
2. 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. But 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. In cases where a special-needs child is adopted, you may be able to get the full credit even if your actual expenses were lower.
Though, there are limits to these funds. If your AGI is higher than $214,520, this credit begins to phase out. If your AGI exceeds $254,520, you are ineligible.
3. Earned Income Tax Credit
While the EITC may seem like a popular tax credit, nearly a quarter of taxpayers who are eligible for the credit do not claim it. Again, this is a credit rather than a deduction—but it can save you big time on your taxes if you qualify.
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.
Tax Deductions Related to Your Health
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.
4. Medical Expenses
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 from various reasons—like a car accident or natural disaster.
These expenses could be many factors, including:
- Payments to medical practitioners
- Hospital and home nursing care
- Addiction programs
- Weight-loss programs for doctor-diagnosed diseases
- Prescription drugs
- Admission and transportation to medical conferences pertaining to diseases present in your immediate family (does not include meals or lodging)
- 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.
5. Health Savings Account Contributions
Health Savings Accounts (HSA) are tax-advantaged accounts, as contributions are tax-deductible and withdrawals are tax-free (as long as they are used for qualified medical expenses).
For 2020, the maximum individual contribution limit is $3,550. For families, it is $7,100. But for senior citizens age 55 and over, you can contribute an extra $1,000. Each HSA carries its own further policies and requirements.
Tax Deductions Related to Your Home
Any homeowner can tell you—there are many costs, both recurring and unforeseen, associated with homeownership each year. Luckily, there are several tax deductions that can help recover some expenses from the previous year.
6. 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.
7. Home Office
After the onset of the COVID-19 pandemic, many Americans began working completely from home. If you for-see this becoming a permanent fixture, you may be able to write off part of your home if used regularly and exclusively for business activities.
This may include some or all costs for your principal place of business, including your:
- Real estate taxes
- Other related expenses
Plus, this deduction applies whether you are a homeowner or a renter. It also does not matter what type of housing—single-family home, apartment, condo, or freestanding structure. It cannot apply to a hotel or temporary lodging, though.
There are two methods to put this into action.
The simplified method requires measuring your business space. From there, 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.
8. 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.
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.
9. State Sales Taxes
Americans must choose between deducting their state and local income taxes or their state and local sales taxes. For most Americans, choosing 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:
- New Hampshire
- South Dakota
The residents of these nine states should instead claim the sales tax deduction on their federal tax return. In order to actually put this to use, there are two separate methods.
The first is to use the IRS tables that correspond to your state. These will help you determine what you can deduct. In addition to these, you can also include sales tax made 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 paid in-state sales tax. This is separate from the amount found in the IRS table for your state.
The other option is to keep careful track of all state sales tax paid throughout the year and to use this information for your tax return.
Overall, the IRS limits the total of itemized deductions related to state and local taxes at $10,000 annually.
10. 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. But 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.
11. Moving Expenses for Military Personnel
For active-duty military who are moving permanently due to military orders, there are important tax deductions available. This includes costs associated with relocating yourself and your family.
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.
12. 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. This deduction covers travel in excess of 100 miles from home. Furthermore, 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.
13. Jury Duty
This deduction applies to some employees who must take time off work for their civic duty. Some companies pay their workers their full salary while they undergo jury duty. But 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, there is a seemingly endless list of costs. This carries through from kindergarten to college and even beyond to professional degrees.
With this in mind, it is essential for all taxpayers who attended (or whose children attended) school or college in 2020 to review the following deductions carefully.
14. Interest Paid on Student Loans
There is a relatively new exception to rules about deducting interest paid on student loans. In the past, nobody benefitted from taxes for 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 student 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.
15. 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 grades kindergarten through 12th grade, at religious or other private schools.
Though this money can come from more than one 529 plan account, it cannot exceed the aforementioned yearly limit.
16. 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.
17. Lifetime Learning Credit
For those who go back to school later in life, there is a tax credit that may help you out. 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.
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.
18. 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. This way, the amount of taxable capital gain is reduced when it comes time to sell shares.
If you forget to subtract this amount, you will ultimately overpay on your capital gains tax.
19. Gambling Losses
For those who dabbled in gambling in 2020, you may be able to deduct associated losses from your tax liability. Though, 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:
- 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.
20. 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.
Frequently Asked Questions
Of course, more complex questions should be directed to your tax professional. But, here are some of the most commonly-asked questions in regards to 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 it 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 the income you are eligible to be taxed on. But, this method does require more time, effort, and organization to accomplish.
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 route to take.
For 2020, a single filer would get a standard deduction of $12,400. At the top of the list, a head of household would reach $18,650.
Can I Claim Missing Stimulus Checks on My 2020 Taxes?
Americans who did not receive one or both of the COVID-19 stimulus checks may be able to recover these funds through their 2020 tax return.
Both stimulus checks were actually refundable tax credits given in advance. For those who received the checks, this money is thus not subject to income tax.
For Americans that met the qualifications but did not receive this money for any reason they can claim the Recovery Rebate Credit on their 2020 taxes. Of course, the IRS will double-check your eligibility and ensure such funds were not already distributed to you.
If you pass these checks, you can expect the applicable funds added to your tax refund or lower the amount you owe.
How Do I Get the Biggest Refund?
Each tax situation is different, so there really is no blanket answer for finding the biggest refund. 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 a qualified tax professional’s services. This may be an accountant or other tax preparer. They will be well-versed in the ins and outs of tax law, potentially finding hidden or oft-overlooked tax deductions and credits.
But be sure to research these services before committing to one fully. 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 be sure all of your bases are covered, and there are no overlooked tax deductions or credits. For more information, speak with your accountant or tax preparer.
You may be aware now more than ever of important financial areas that are not up to par. When it comes to insurance, your 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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