Every year, countless Americans miss out on tax deductions that could save them a bundle. It’s easy to overlook these deductions, especially when tax season rolls around, and you’re scrambling to get everything in order. But knowing about these commonly missed tax deductions can make a difference in what you owe—or what you get back. Let’s take a look at some of the deductions that often fly under the radar.
Key Takeaways
- State sales taxes can be deducted, especially beneficial for those in states without income tax.
- Reinvested dividends increase your tax basis, reducing taxable gains when you sell shares.
- Out-of-pocket costs for charitable work, like mileage and supplies, can be written off.
- Interest on student loans paid by someone else can still be deducted by the student.
- Certain moving expenses, especially for active-duty military, are deductible.
1. State Sales Taxes
When it comes to tax deductions, state sales tax is often overlooked, especially by those living in states without income tax. This deduction is particularly beneficial for residents in states like Florida, Texas, and Nevada, where state income tax isn’t a thing. Here’s how it works: you can choose to deduct either state income taxes or state sales taxes from your federal tax return. For those living in states that don’t have an income tax, the sales tax deduction can be a game-changer.
How to Claim the Deduction
- Use IRS Tables: The IRS provides tables to help you determine the amount of sales tax you can deduct. These tables consider your income and family size to estimate a deductible amount.
- Add Major Purchases: Did you buy a car, boat, or do some major home renovations? You can add the sales tax from these big-ticket items to the table amount.
- Track Receipts: If you prefer, you can keep all your receipts throughout the year and add up the actual sales tax paid. This might be tedious, but it could result in a larger deduction.
Remember, the total amount you can deduct for state and local taxes, including sales tax, is capped at $10,000. This is part of the SALT tax deduction, which can help lower your federally taxable income.
For those in states without an income tax, taking the time to figure out the best option between sales and income tax deductions can lead to significant savings. Don’t leave money on the table by missing out on this deduction!
2. Reinvested Dividends
When it comes to investments, many people overlook the tax implications of reinvested dividends. This can lead to paying more taxes than necessary. Reinvested dividends are those that are automatically used to purchase more shares of the same stock or mutual fund, instead of being paid out to the investor in cash.
Here’s the catch: each reinvestment increases your cost basis in the investment. Cost basis is crucial because it determines your capital gains when you sell the investment. If you ignore reinvested dividends, you might end up reporting a higher gain than you actually realized, leading to a bigger tax bill.
Understanding Cost Basis
- Initial Purchase: This is the original amount you paid for the investment.
- Reinvested Dividends: Each reinvestment adds to your cost basis, reducing your taxable gain.
- Selling the Investment: When you sell, subtract your total cost basis from the sale price to find your capital gain or loss.
Steps to Ensure Accurate Tax Reporting
- Keep Records: It’s important to keep detailed records of all reinvested dividends. Your brokerage should provide an annual statement.
- Use Tax Software: Many tax software programs can help track your cost basis and reinvested dividends.
- Consult a Professional: If you’re unsure, a tax professional can ensure you’re reporting correctly.
Remember, overlooking reinvested dividends can cost you. Keeping track might seem tedious, but it saves money in the long run.
3. Out-Of-Pocket Charitable Contributions
Understanding Out-Of-Pocket Charitable Contributions
When you think of charitable donations, big checks and payroll deductions might come to mind. But did you know that the little expenses you incur while volunteering can also be deducted? These are called out-of-pocket charitable contributions, and they can add up over time.
What Can Be Deducted?
Here’s a quick rundown of what you might be able to deduct:
- Supplies and Materials: If you buy construction supplies for a charity project or ingredients for a soup kitchen meal, those costs are deductible.
- Travel Expenses: Driving to and from volunteer activities? You can deduct 14 cents per mile, plus parking and tolls.
- Other Small Expenses: Even the cost of stamps for a school fundraiser can count.
Remember, these deductions are only applicable if you itemize on your tax return.
The Importance of Documentation
Keeping records is essential. If your contribution exceeds $250, you’ll need written acknowledgment from the charity. For smaller expenses, keep receipts and logs of your activities. This is crucial if you want to ensure your deductions are accepted by the IRS.
While it might seem tedious, keeping track of these small expenses can lead to significant savings come tax season. Every little bit helps, and those pennies add up.
Limits on Deductions
According to the IRS, you can generally deduct cash donations up to 60% of your federal adjusted gross income (AGI), though limits vary depending on the type of contribution and charity. Understanding these limitations can help you maximize your tax benefits from charitable giving.
So next time you volunteer, keep track of those little costs. They might just make a big difference on your tax return.
4. Student Loan Interest Paid
Paying off student loans can be a burden, but there’s a silver lining when tax season rolls around. You might be able to deduct up to $2,500 of the interest you paid on qualified student loans. This deduction is available even if you don’t itemize your deductions, which is a nice bonus.
Who Qualifies?
Not everyone can claim this deduction, though. Here are a few things to keep in mind:
- If you’re married but filing separately, you can’t take this deduction.
- If you or your spouse is claimed as a dependent on someone else’s tax return, you’re out of luck.
- High earners might also find themselves disqualified due to income limits.
Special Situations
Sometimes, parents help out by paying their child’s student loan interest. In these cases, the IRS treats it as if the child received the money as a gift and then paid the interest themselves. This means that if the child isn’t claimed as a dependent, they can still qualify for the deduction.
Important Forms
If you’ve paid more than $600 in interest over the year, you should receive a Form 1098-E from your loan servicer. This form is crucial for claiming the deduction, so keep it handy.
Student loan interest deductions can be a small relief in the big world of taxes. They might not cover all your expenses, but every little bit helps when you’re tackling those hefty student loans.
5. Moving Expenses
Most folks can’t deduct moving expenses anymore, thanks to changes in the tax laws back in 2018. But there’s an exception for military personnel. If you’re on active duty and have to move due to a military order, you can still claim those moving expenses on your taxes. This only applies if Uncle Sam isn’t already reimbursing you.
For those in the military, here’s what you can deduct:
- Costs of travel and lodging for you and your family.
- Moving household goods.
- Shipping cars and pets.
Remember to keep all your receipts. The IRS will want proof of these expenses.
Another thing to note is that if the move is permanent and ordered by the military, you won’t have to pay tax on any qualified moving expense reimbursements. This is a small way to acknowledge the sacrifices made by those serving in the armed forces.
If you’re curious about what kind of mileage deductions you might qualify for, the IRS has specific guidelines. Make sure to check them out to maximize your benefits.
6. Child And Dependent Care Credit
The Child and Dependent Care Credit is a significant tax relief that many overlook. Unlike deductions, this credit directly reduces your tax bill, making it a valuable asset for eligible taxpayers. If you’re juggling work and childcare expenses, this credit might ease some financial burdens.
Understanding the Credit
To qualify, your childcare expenses must be work-related. This means you and your spouse, if filing jointly, need to be working or actively looking for work. The credit applies to children under 13, but if you have a dependent with a disability, age restrictions do not apply.
Eligible Expenses
You can claim a variety of childcare expenses, not just traditional daycare:
- Summer day camps
- Preschool tuition
- Payments to relatives for babysitting (excluding your spouse, the parent of the child, or a dependent you claim on your return)
Calculating the Credit
The credit covers 20% to 35% of qualifying expenses, with a maximum of $3,000 for one dependent and $6,000 for two or more. The percentage depends on your income level.
Important Considerations
- If you use a dependent care flexible spending account through your employer, you can still claim the credit, but only on expenses above the account’s limit.
- The American Rescue Plan temporarily increased the credit for 2021, making it fully refundable and raising the maximum qualifying expenses.
Parents juggling work and childcare can find some relief through the Child and Dependent Care Credit. It’s not just about daycare—consider camps and other care options to maximize your benefits.
For parents of children with functional needs, the credit can cover up to 35% of qualifying expenses, with limits of $3,000 for one child or $6,000 for multiple dependents.
7. Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a big deal for a lot of folks, especially those with lower incomes. It’s a refundable credit, which means it can actually put money back in your pocket even if you don’t owe any taxes. Unfortunately, about a quarter of eligible taxpayers miss out on this opportunity every year, often because they don’t know they qualify or find the rules a bit confusing.
Here’s the scoop: The credit amount varies based on your income, filing status, and how many kids you have. For 2024, the EITC ranges from $632 to $7,830. That’s a nice chunk of change, right?
How to Qualify
To snag this credit, you need to file a tax return, even if you don’t owe a dime. If you’ve missed claiming it in past years, no worries—you can still file for up to three previous years to get that refund.
Who Can Benefit?
It’s not just for those scraping by. Many folks who were once considered "middle class" might now qualify due to job losses, pay cuts, or reduced work hours. So, if your financial situation has shifted, it’s worth checking out.
- Lost your job?
- Took a pay cut?
- Worked fewer hours?
If any of these sound familiar, you might be in luck.
Don’t let the complexity of tax rules scare you away from potential refunds. A little effort could lead to a significant payoff.
8. Jury Pay Paid To Employer
When you’re called for jury duty, some employers continue to pay your full salary while you’re serving. However, they might ask you to hand over the jury fees you earn. This means you report those fees as taxable income. But here’s the kicker: if you turn over that jury pay to your employer, you can deduct that amount on your tax return. This deduction is available whether you choose to itemize or take the standard deduction.
Here’s a quick rundown of what you need to know:
- Jury pay is considered taxable income by the IRS.
- If you hand over your jury pay to your employer, you can deduct that amount.
- No deduction is allowed for jury pay that you keep.
Remember, the deduction ensures you’re not taxed on money that just passes through your hands. It’s a small detail, but overlooking it could mean paying tax on cash you never really pocketed.
9. Refinancing Mortgage Points
Refinancing your mortgage can save you money on interest, but it also comes with its own set of tax benefits. One such benefit is the ability to deduct mortgage points paid during the refinancing process. These points, often called loan origination fees or discount points, can be deducted over the life of the loan.
When you refinance, you can’t deduct all the points at once like you might have done when you first bought your home. Instead, you’ll spread the deduction over the term of the new loan. For instance, if you have a 30-year mortgage, you’ll deduct 1/30th of the points each year. This might not seem like much annually, but over time it adds up.
Here’s a quick breakdown:
- Loan Term: 30 years
- Points Paid: $1,000
- Annual Deduction: $33 per year
However, there’s a twist. If you pay off the loan early, say by selling your house or refinancing again, you can deduct all the remaining points in that year. But be cautious—this doesn’t apply if you refinance with the same lender.
Many homeowners overlook this deduction, thinking it’s too small to bother with. Yet, every bit counts, especially when it comes to taxes.
For those who itemize deductions, these mortgage points can be a nice little bonus. Just remember to check the mortgage interest deduction rules to ensure you’re maximizing your tax benefits.
10. Medical Expenses
Navigating through medical expenses can be daunting, but knowing what you can deduct might ease the burden. Medical expenses that exceed 7.5% of your adjusted gross income (AGI) are deductible. This means if your AGI is $50,000, you can only deduct expenses over $3,750.
Deductible Medical Expenses
Here’s a list of some common medical expenses you might be able to deduct:
- Co-payments and Prescription Drugs: These are often overlooked but can add up quickly.
- Therapy and Nursing Services: If not fully covered by insurance, these can be included.
- Alternative Treatments: Acupuncture and smoking cessation programs might qualify.
Travel for Medical Care
Transportation costs related to medical care are also deductible. This includes:
- Mileage at $0.21 per mile for 2024.
- Parking fees and tolls.
- Lodging, up to $50 per person per night, if you need to stay overnight for treatment.
Health Savings Accounts (HSAs)
Contributions to HSAs are tax-deductible. For 2025, the limit is $4,300 for individuals and $8,550 for families if you’re using a high-deductible health plan.
Understanding these deductions can lead to significant savings, especially when healthcare costs are a major part of your budget. Keep track of all your medical-related receipts and consult with a tax professional to maximize your deductions.
Wrapping It Up: Don’t Leave Money on the Table
So, there you have it, folks. Taxes can be a real pain, but missing out on deductions? That’s just adding insult to injury. We’ve gone through 15 deductions that often slip through the cracks, and hopefully, you’re now armed with the info you need to keep more of your hard-earned cash. Remember, every little bit counts, and those small deductions can add up to big savings. So, next time tax season rolls around, take a closer look at your return. Who knows? You might just find a few extra bucks hiding in plain sight. Happy filing!
Frequently Asked Questions
What are state sales taxes and how can I deduct them?
State sales taxes are taxes added to purchases at the state level. If you live in a state without income tax, you might save money by deducting sales taxes instead. You can use IRS tables or keep track of your receipts to see what you can deduct.
How do reinvested dividends affect my taxes?
Reinvested dividends aren’t a deduction, but they can reduce your taxable income. When you reinvest dividends, your tax basis in the stock increases, which can lower taxable capital gains when you sell.
Can I deduct small donations to charity?
Yes, small out-of-pocket expenses for charity, like ingredients for meals you make for a nonprofit, or mileage driven for charitable work, can be deducted. Keep receipts for these small contributions.
What student loan interest can I deduct?
You can deduct up to $2,500 of student loan interest, even if someone else pays it for you. The IRS treats it as if they gave you the money to pay the loan.
Are moving expenses deductible?
Moving expenses are deductible for active duty military members who move due to a military order. For others, this deduction is not available.
How can I deduct medical expenses?
You can deduct medical expenses that are more than 7.5% of your adjusted gross income. This includes things like insurance premiums and other healthcare costs.
