Every year millions of taxpayers overpay their income taxes because they failed to take a deduction they were legally allowed to claim. The biggest reasons for missed deductions are not knowing what deductions are available, and having a tax preparer who fails to properly determine eligibility. Here are some of the most overlooked deductions.
- State sales taxes. This is of particular importance in states with no income tax, such as Texas and Florida.
- Reinvested dividends. This is not really a deduction, but since these dividends were previously taxed and then reinvested, the taxpayer can add these dividends to the cost of their stock when they sell to reduce the taxable gain.
- Expenses related to charitable work. If you volunteer at your church or a charity, you may deduct expenses and mileage related to it. As an example, if you bring food for a church dinner, you can deduct the cost of the food you buy and the mileage related to buying and delivering the food. Keep your receipts and a mileage log.
- Student loan interest paid by mom and dad. Normally you cannot deduct expenses that you don’t pay yourself. But if the parents pay a student loan, the IRS treats it as if the parents made a gift to the child and then the child paid the loan. So a child who is not being claimed as the parents’ dependent can deduct up to $2,500 of student loan interest on their own return.
- Job hunting costs. If you are looking for a new position in the same line of work, keep track of your expenses. If you itemize, you can deduct the amount over 2 percent of your income. Unfortunately, job hunting costs for your first job out of college are not deductible.
- Moving expenses for your first job. To qualify, your first job must be more than 50 miles away from your old home. You get to deduct the cost of moving yourself and your household goods to the new location. If you drive, don’t forget to deduct your mileage. You get this deduction whether you itemize or not.
- Military reservists’ travel expenses. To qualify, you must be more than 100 miles away for drills and meetings. You get this deduction whether you itemize or not.
- Reduce self-employment taxes with the health insurance deduction. If you use a tax program or a tax preparer, this is an automatic deduction. But I have seen handwritten, self-prepared returns where this is missed.
- Child care credit paid by a reimbursement account at work. A credit is worth much more than a deduction because it reduces your taxes dollar for dollar. A deduction only reduces your amount of taxable income. A $100 credit will save you $100 in tax. A $100 deduction will only save you $25 if you are in the 25 percent tax bracket. If you pay your child care bills through a reimbursement account at work, it’s easy to overlook the child care credit in excess of the $5,000 maximum allowed by these tax-favored accounts. Up to $6,000 in child care expenses (for two or more children) qualifies for the credit. If you run the $5,000 maximum through your work account but pay $6,000 or more in actual child care costs, you can claim the credit on the additional $1,000 expenses. That would cut your tax bill by at least $200.
- State taxes paid with your previous year’s return. If you paid a tax bill last year, deduct this amount as an itemized deduction this year.
- Points paid when you purchase a home. Don’t forget to deduct the points paid when you purchase a home. These are often missed because they are called loan origination fees, loan discounts, or discount points rather than points on the closing statement.
- Home improvement loan points. Points paid on a loan to improve your principal residence are fully deductible in the year paid.
- Seller-paid points. Points paid by the seller are treated as paid directly by the buyer from funds that have not been borrowed. In English, you must have made a down payment more than the amount of the points in order to deduct them.
- Refinanced points. Points paid to refinance your home are not deducted in the year of the refinance. Instead, they are amortized over the life of the loan. Taxpayers commonly forget to write off any remaining amount when they sell the home or refinance it again.
- Section 179 deduction or bonus depreciation on business equipment. Equipment normally must be depreciated over the useful life of the equipment as set out by IRS schedules, but most businesses can deduct 100 percent in the first year using Section 179. Depreciation is a complicated subject you should discuss with your tax preparer if you buy business equipment.
- Travel and auto expenses related to medical care for you, your spouse, and your dependents. You can use actual expenses or use the standard mileage rate provided by the IRS (19 cents in 2016).
- Sales taxes paid on large purchases. If you itemize, you can add sales taxes paid for large purchases (such as cars, boats, motor homes, or home improvement materials) to the amount of sales tax you can deduct based on the IRS table for a bigger deduction.
- Work-related education costs. To be deductible, courses must be specifically required by your employer, by law, by government regulations, or to maintain or improve skills required to perform your present job.