Commonly overlooked tax deductions and credits

People frequently miss out on excellent tax-saving options because they are unaware of them. Or it becomes challenging to keep up with the most recent tax exemption, tax credits, and tax deductions because tax regulations change. Many American wage earners can keep more earnings thanks to itemized tax deductions rather than giving the government their hard-earned money. You may not be aware of all the available tax deductions. Deductions can result in more money for you and less for the Internal Revenue Service (IRS) if you maintain accurate records.

Therefore, these are the 30 most overlooked tax deductions, credits, and exemptions you need to know about.

1. Refund of state income taxes

Schedule A of the IRS Form 1040 contains a section for reporting a state income tax refund. However, most taxpayers do not have to record state tax refunds on their federal income tax returns. This is so that you can avoid paying taxes on the state tax refund if your most recent federal tax return included the standard deduction for state and local taxes.

Therefore, you shouldn't report the refund as income if you didn't itemize deductions in the year you received the state income tax refund. In short, don't declare a state income tax refund that you already received.

Consult an expert on whether your state income tax refund is taxable to determine if the income on the Form 1099-G is taxable.

2. Paid state tax for the last year

When you submitted your 2021 state income tax return, did you owe any taxes? Then, on your 2022 federal return, you can deduct that sum from state taxes. You may also include state income taxes deducted from your paychecks or paid over the year in quarterly anticipated payments.

Remember that the annual cap on the state and local tax deduction is $10,000 ($5,000 for married couples filing separately).

3. Charitable deductions made out-of-pocket

Significant philanthropic contributions you made throughout the year via check or payroll deduction are simpler to recall. However, little acts of kindness can still have an impact and build up. For instance, purchasing ingredients for a nonprofit organization's soup kitchen or stamps for a school's fundraising letter can be seen as a charitable gift.

According to Ben Mcinerney, Director of Go Tree Quotes, taxpayers can deduct monetary charitable contributions even if they do not itemize their tax deductions on Schedule A. Non-itemizers are allowed a $300 cash donation deduction per tax year.

Unfortunately, married taxpayers filing jointly are likewise subject to the $300 cap, not the $600 cap. So save those receipts so you can prove the donations.

Maintaining your receipts is one of the important tax planning tips. You'll also need a receipt from the organization attesting to the support you gave if your donation is $250 or more.

Additionally, you can deduct parking fees and tolls paid in addition to 14 cents per mile if you use your automobile for charity throughout the year.

4. Dividends reinvested

Even though this isn't a tax deduction, it can help you save a lot of money. And a lot of taxpayers overlook it. Remember that each reinvestment raises your "tax basis" in the stock or mutual fund if, like most investors, you have your mutual fund and stock dividends automatically reinvested in more shares.

As a result, when you sell your shares, the amount of taxable capital gain is decreased (or the amount of tax-saving loss is increased).

5. The state's sales tax

Those who reside in states without an income tax will benefit the most from this write-off. Alaska, Nevada, Florida, New Hampshire, South Dakota, Washington, Tennessee, Texas, and Wyoming are the states that we are talking about. State and local sales taxes or income taxes must be subtracted. The state and local income tax deduction is typically a better deal for the majority of residents of states that levy income taxes.

There are two ways to deduct sales tax on your tax return if you live in a state without income taxes.

  • One way to determine what you can write off is using the IRS tables given for your state.
  • Additionally, suppose you bought a car, boat, jet, or house or made significant home improvements.

In that case, you might be allowed to add the state sales tax you paid on these expensive purchases to the amount stated in the IRS tables up to the state's maximum allowance. In addition, you can use a record of all the sales tax you paid throughout the year.

Utilizing the IRS's Sales Tax Calculator is the easiest approach to determine what you can write off. Remember that the combined amount of all of your itemized deductions for state and local taxes cannot exceed $10,000 per year.

6. Student loan interest paid by you or a third party

In the past, no one received a tax break if parents or another party repaid student loans taken out by a student. According to the legislation, you had to be responsible for the debt and make the payment personally in order to qualify for a deduction. However, there is a new exception.

Even if others repay the loan, the IRS regards it as though they provided you the money, and you then pay the debt yourself. You may be aware that you could be able to claim a deduction.

Therefore, a student who is not listed as a dependent may be eligible to deduct up to $2,500 in interest on student loans that you or another person paid.

7. Costs of travel for military reserve

Travel expenses to exercises or meetings can be deducted for members of the National Guard or military reserves. To qualify:

  1. You must go more than 100 miles from home and spend the night away from home. In addition to an allowance for using your vehicle to travel to and from exercises, you may be able to write off the cost of housing and half of your meals provided you meet the requirements.
  2. You can deduct 50% of your food expenses and housing charges from your taxes. Between December 31, 2020, and December 31, 2022, meals consumed while traveling were fully deductible.
  3. The rate is 62.5 cents per mile for travel in 2022 (due to a mid-year IRS change) and 65.5 cents per mile for travel in 2023, plus the cost of parking and tolls.

Even if you itemize your tax deductions without taking the standard deduction, you may still claim this deduction.

8. Military personnel's moving costs

One significant group of taxpayers can still claim their moving expenses to the IRS even if most of them lost the option to do so starting in 2018. If you are an active duty military member moving, you may still write off these costs as long as you don't get the government to pay for your move.

Additionally, qualified moving expense reimbursements are tax-free as long as the military mandated the relocation and the move is permanent.

Therefore, gather your receipts right now so you may start deducting the price of your family's trip and lodging, packing and shipping home items, autos, and your cherished pets! And that's fantastic news for the men and women who heroically served our nation, for whom we are grateful.

9. Losses from gambling

Only if you itemize deductions are gambling losses tax deductible. Additionally, the amount of gaming wins you report as taxable income determines the maximum amount of the gambling loss deduction.

However, in addition to "traditional" gambling losses (such as those sustained at a casino), the price of unsuccessful bingo, lottery, and raffle tickets, for instance, is also regarded as a form of deductible gambling loss. Keep all of your gambling receipts, such as losing tickets, if you intend to claim this tax deduction.

The IRS also advises that you keep a daily record of your gambling activity, including the date, kind of wager, name, and location of the casino, names of those present when you made the wager, and the winning and losing sums.

10. Jury pay paid back to the employer

Many firms continue to pay their employees full salaries while they are on jury service. In some circumstances, workers whose salaries were paid while serving on a jury must give the employer their jury pay.

Therefore, even though you must report jury pay to the IRS as income, you are still entitled to a tax credit for any jury pay you returned to your employer.

11. Medical and dental costs

Taxpayers can write off a wide range of dental and medical expenses. They consist of disease detection, treatment, prevention, and cure.

Payments to physical (dental, medical, surgical) and mental (psychiatrists, psychologists) health specialists are also covered.

There are, of course, some restrictions. You cannot claim the care if you were reimbursed or someone else paid the cost; it must be for you, your spouse, or your dependents. Additionally, you can only deduct what exceeds 7.5% of your adjusted gross income or AGI.

Most professional medical payments, such as those paid to a doctor or dentist, are generally deductible, but general health expenses, such as vitamins or health club dues, are not. You may also subtract:

  • Cost of prescription drugs.
  • Expenses related to mental health, such as the price of counseling.
  • The price of orthotic devices, dentures, or glasses.
  • Costs related to medical requirements, such as parking expenses for seeing the doctor.
  • Rates for health insurance.
  • The price of senior care that is covered by VA benefits or paid out of pocket, such as in-home assistance or adult day services.

Does a family caregiver need to pay taxes? Sometimes. Consult your accountant to learn who needs to declare such income and whether the senior individuals can deduct that sum from their taxes as medical expenditures.

Taxpayers may be qualified for a health insurance premiums deduction if they are self-employed or have income from a side business.

12. Registration fees for vehicles

Taxes on a vehicle continue after you purchase it. There is a registration cost in every state. These enrollment costs change.

Sometimes it's a once-a-year price; other times, it's a flat rate; other times, it depends on the car's worth or weight; and other times, it's a combination of these factors.

The good news is that you can only write off the value-based element of the registration; the weight-based portion cannot be written off.

13. Child and Dependent Care tax credit

A tax credit is far superior to a tax deduction since it lowers your tax burden on a dollar-for-dollar basis. So, failing to claim one is worse than failing to claim a deduction that only reduces taxable income. Many parents and families find child care to be pricey. The child and dependent care tax credit might help with that.

If you pay your child care expenses through a reimbursement account at work, you may overlook the Child and Dependent Care Credit.

  • The law permits you to deduct up to $5,000 of these costs from your paycheck in 2022 using a tax-advantaged reimbursement account at work.
  • For 2022, you may be eligible for a non-refundable tax credit of up to 35% of your qualifying expenses, or $3,000 per kid.

If you hired a provider to look after your children under 13 (or a disabled dependent of any age).

  • The credit can reach a maximum of $6,000 for families with two or more eligible kids.
  • The credit for up to $6,000 in care costs is available, but $5,000 from tax-favored accounts cannot be claimed.
  • So, if you use the maximum $5,000 of a work-sponsored plan but spend more on child care connected to your job, you can still claim a credit for up to an additional $1,000.
  • Using the minimal 20% of the expenses would reduce your tax burden by at least $200. For households with lesser incomes, the credit proportion increases.

When a dependent is claimed on your return but is not eligible for the child tax credit, you are entitled to a $500 tax credit. Therefore, even if they are in college, your children above 17 can help you save money on taxes. You might also claim the dependent tax credit for senior family members you care for at home.

However, it's crucial to remember that if your adjusted gross income exceeds $200,000 for the 2022 tax year, the combination of the child credit and the credit for additional dependents will phase out. The phase-out modified adjusted gross income threshold for taxpayers (married filing jointly) is $400,000.

The child and dependent care credit can partly cover the expense of caring for additional dependents. For instance, costs associated with caring for an aging parent who lives with an adult child may be eligible for the credit if the child claims the parent as a dependent on their tax return.

14. The tax break for summer camp expenses

The IRS dramatically increased the child and dependent care tax credit in 2021, rising to $4,000 for one child and $8,000 for two or more qualifying children. If you pay for child care while you work, this credit can still lower your tax obligation by more than $1,000 even if it has returned to its previous level for tax year 2022.

Many costs relating to children are eligible for the credit. While you and your spouse work or hunt for work, you can deduct the expense of before- and after-school care, nanny services, daycare, preschool, and even summer day camps for kids under 13 (overnight camps are not eligible). College expenses won't be considered under this tax break.

You can also apply for the credit if you have other qualified dependents, such as parents or grandparents, or if they need outside daycare because you can't leave them alone.

For one child under 13 and two or more children, the credit is now worth up to 35% of eligible childcare costs up to $3,000 and $6,000, respectively. There is no upper-income limit for eligibility. However, that proportion decreases as your income increases.

15. Earned income tax credit (EITC)

Every year, millions of people with lower incomes use this credit. The IRS estimates that 25% of taxpayers entitled to the Earned Income Tax Credit do not apply for it. Due to the complexity of the criteria, some persons do not receive the credit. Others merely don't realize they meet the requirements.

The EITC has various filing statuses from $560 to $6,935 for 2022. It is a refundable tax credit rather than a deduction. The credit is intended to increase low- to moderate-income workers' take-home pay. But only those with lower incomes are eligible for the credit. Due to job losses and wage cuts, tens of millions of people and families previously labeled "middle class," including many white-collar workers, are now categorized as "low income."

You may receive a specific refund depending on your income, marital status, and family size. Even if you don't owe any taxes, you must file a tax return to receive a refund from the EITC. Additionally, you can file any time during the year to request an EITC refund for up to three prior tax years if you were previously entitled to claim the credit but did not.

16. American opportunity tax credit

The American Opportunity Tax Credit, or AOC for short, is based on a maximum annual credit per student of $2,500 and 100% of the first $2,000 spent on eligible college expenditures and 25% of the next $2,000. But only the first four years of college qualify for the credit.

People with modified adjusted gross incomes of $80,000 or less are eligible for the full credit. The income threshold for married filing jointly is $160,000 or less. However, the American Opportunity tax credit gradually disappears for individuals with incomes exceeding those amounts.

A tax refund could result if the American Opportunity tax credit exceeds your tax liability. (That's partly because most tax credits are "nonrefundable," which means they won't result in an IRS check.)

17. Lifetime learning credit

You can deduct a maximum of $2,000 from the lifetime learning credit, which is 20% of the first $10,000 you spent on tuition and fees. Like the American opportunity tax credit, the lifetime learning credit does not consider living expenditures or transportation-eligible expenses. Study materials, books, stationeries for study, or other items required for the education may be claimed.

18. The interest deduction for student loans

Borrowers who paid interest on their student loans may deduct up to $2,500 from their taxable income thanks to the student loan interest deduction.

19. Adoption credit

The adoption costs per child up to $14,890 are covered by this item. If your 2022 modified adjusted gross income exceeds the amount of $263,410, the credit will gradually decrease at specific income levels.

20. Mortgage loan interest

You could deduct house mortgage interest on the first $750,000 of your loan from your property taxes if you successfully bought your home after December 16, 2017. If you owned your house before December 16, 2017, the upper maximum increases to $1 million.

If you're one of the married couples filing jointly or separately, those figures are $375,000 and $500,000, respectively.

You may also use mortgage interest points, which are a cost that borrowers pay to lenders in exchange for a reduction in their interest rates. These points typically amount to 1% of the overall loan amount.

21. Mortgage refinancing points

The points you spent to obtain your mortgage can be written off when you purchase a home.

However, when you refinance, you typically have to spread out the points on the new loan throughout the loan. If you have taken a 30-year mortgage loan, you can subtract 1/30th of the points each year. According to that example, you would pay $33 annually for every $1,000 points.

Additionally, you can deduct points for the upgrades if you spend a portion of the refinanced loan to improve your house. (The remaining points are subtracted over the loan's term.)

In any case, you can deduct all remaining points from your tax bill in the year you pay off the loan (for example, if you sell your home or refinance).

You have one exemption from this rule. When you refinance a refinanced loan with the same lender, the points paid on the most recent agreement are added to the remaining funds from the prior refinancing. Over the course of the new loan, you gradually subtract that sum.

22. Personal property taxes and the mortgage paid before selling

You can write off and personal property taxes you paid in the year of the sale on your 2023 personal taxes. The maximum amount of property tax credits is $10,000, and they only apply to property taxes paid in that particular year.

Property taxes and the mortgage interest paid in the year you sold are itemized tax deductions. To benefit from this, you must avoid standard deductions and choose itemized deductions.

The IRS also caps the amount of interest that can be deducted for house mortgage debt at $750,000.

23. Home office deduction

Whether you own or rent your home, if you regularly use a portion of it or another building on your property entirely for business, you are eligible for the home office deduction.

Depreciation, insurance, maintenance, interest on a mortgage, rent, repairs, and utilities are tax-deductible expenses you may write off. The maximum charge is $1,500 and is $5 per square foot of the residence used for business. However, you cannot use the home office deduction as an employee.

24. Disabled taxpayers' tax breaks

Taxpayers who are disabled may write off costs for goods or services they require to work. For instance, you can write off the costs of veterinary care, training, food, and licensing if you have a service animal or guide dog.

It doesn't matter if the disability is mental or physical. As long as you aren't paid for it, the cost is "reasonable," and it doesn't interfere with your ability to perform your job. When determining your eligibility for benefits, the Social Security Administration (SSA) will deduct those expenses from your taxable income.

25. PPP loan costs

Don't forget that deductible business expenses paid for using funds from a forgiven PPP loan remain deductible on the business schedule, thanks to the COVID-Related Tax Relief Act passed late in December 2020. For state taxes, this might not be the case.

26. Spousal IRA

The tax code permits a spouse who is not employed to base their IRA contribution on the income of the working spouse when both spouses are employed. When both couples have been working for years and establishing their individual contributions on their income, and then one of them retires, this tax benefit is typically disregarded. The working partner might have a pension plan provided by the employer, and the salary might prevent them from making a deductible IRA contribution.

But the non-working retired spouse may still contribute based on the working partner's income. If the couple's combined income is within IRS guidelines, spouses may contribute to Roth IRAs. Due to a change in the law, there is no age restriction for contributions to IRAs as of 2020.

27. 401(k) contributions tax deduction

The IRS can not deduct taxes if you directly transfer funds into a 401(k) from your paycheck. The maximum donation allowed in 2022 was $20,500 ($27,000 if you are 50 or older). Although self-employed individuals are permitted to form their own 401(k)s, these retirement plans are typically sponsored by employers.

28. Self-Employed health insurance deduction

A self-employed person (or a partner or a shareholder holding more than 2% of the voting stock of an S corporation) may typically deduct 100% of the cost of medical insurance for themselves, their spouse, and their dependents as an above-the-line expense, subject to the self-employed taxpayer's net income from self-employment.

However, no deduction is permitted for any month in which the self-employed person is qualified to join a health insurance program that is maintained at no cost to them, their spouse, any dependents, or any children who are under the age of 27 as of the end of the tax year. A benefit is considered "subsidized" if the employer contributes at least 50% of the cost.

The health insurance premiums deducted as a Schedule A medical expense cannot also be deducted as an above-the-line self-employed health insurance expense.

29. Income in Respect of a Decedent (IRD)

The so-called IRD deduction is one of the most underutilized tax breaks. IRD, or income in respect of a deceased, is the abbreviation. The income is taxable to the decedent's estate, and the estate's beneficiaries are IRD income. As a result of the double taxation, the beneficiaries often obtain a deduction equal to the difference between the estate tax of the decedent calculated with and without the taxed income. Beneficiaries would be eligible for the common tax deductions if the decedent's estate were sizable enough to be liable to estate tax.

30. Penalty exemption for seniors in their sixties

Taxpayers usually must pay 90% of what they owe throughout the year, or 100% of the tax from the prior year, through withholding or anticipated tax payments because the U.S. tax system is based on a pay-as-you-earn model.

If you don't, you may be penalized for underpaying taxes when you file your return; you owe more than $1,000. The penalty operates similarly to interest on a loan, making it appear you borrowed the unpaid tax from the IRS.

The penalty has several exceptions, including a little-known one that can shield retirees and other taxpayers aged 62 and over in the year they take their pension and the year after.

This is not a tax deduction you may make on your federal tax return. Instead, you can utilize IRS Form 2210 to request a fine waiver if you have "reasonable cause."

The penalty has a few exceptions, one of which is a little-known one that can shield retirees 62 years old and older from the penalty in the year they retire and the year after. If you have "reasonable cause," you may submit an IRS Form 2210 to request a fine waiver.

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