When it comes to preparing your taxes, many people miss out on potential deductions simply because they’re not well-known or easily overlooked. Making the most of all the deductions available to you can lower your taxable income considerably and possibly result in large savings. Below is a detailed exploration of some of the most commonly overlooked tax deductions.

Unreimbursed Business Expenses

Employees may be able to deduct certain unreimbursed business expenses, which are costs incurred while performing job duties that are not reimbursed by the employer. Although the Tax Cuts and Jobs Act aka TCJA of 2017 has limited many of these deductions for employees through 2025, exceptions still exist. Certain professionals, like qualified performing artists and educators, might still benefit from these deductions.

• Home Office Expenses
  • Deductible if the space is used exclusively for business purposes.
  • Includes a portion of rent, utilities, and home maintenance.
  • The real expense technique or the simplified method (using a standard rate per square foot) can be used to determine the deduction.
• Business Mileage
  • Deductible if you use your personal vehicle for business purposes.
  • Requires accurate record-keeping of miles driven for business, as well as related expenses.
  • Standard mileage rate or actual vehicle expenses (gas, maintenance, etc.) can be used for the deduction.
• Office Supplies
  • Includes costs for items such as pens, paper, and printer ink used for work.
  • Deductible as long as they are necessary for the performance of job duties and not reimbursed by the employer.

Medical Expenses

Expenses for qualifying medical care exceeding 7.5% of an individual’s adjusted gross income (AGI) are deductible by taxpayers. This deduction covers a broad range of medical-related expenses, not just those for treatments but also associated costs.

• Health Insurance Premiums
  • Deductible if paid with after-tax dollars (not through a payroll deduction).
  • Includes premiums for individual or family plans and long-term care insurance.
• Prescription Medications
  • Deductible if prescribed by a physician and used to treat a medical condition.
  • Includes medications purchased at a pharmacy or through mail order.
• Travel Expenses Related to Medical Care
  • Deductible if the travel is necessary for obtaining medical care.
  • Includes mileage, lodging, and meals during travel for medical treatments.
  • Must be documented with receipts and travel logs.

Educational Expenses

In addition to the well-known American Opportunity Credit and Lifetime Learning Credit, there are other educational-related expenses that might be deductible.

• Student Loan Interest
  • Deductible up to $2,500 per year.
  • Available for interest paid on qualified student loans.
  • Income limits apply for eligibility.
• Certain Work-Related Educational Expenses
  • Deductible if the education maintains or improves job skills or is required for the current job.
  • Includes tuition, books, and supplies.
  • Must be directly related to the current job and not for a new occupation.

Charitable Contributions

Charitable donations are a well-known deduction, but several specific types of contributions often get overlooked. These donations can provide valuable tax benefits if properly documented.

• Donations of Property
  • Description: Contributions of tangible items such as clothing, furniture, or household goods to charitable organizations.
  • Documentation: Must be documented with receipts from the charity or a written acknowledgment, and the items should be in good condition.
  • Valuation: You can typically deduct the fair market value of the items donated. For high-value items, you might need a professional appraisal.
• Out-of-Pocket Expenses Incurred While Doing Volunteer Work
  • Description: Costs incurred while volunteering, such as supplies, uniforms, or mileage.
  • Documentation: Keep detailed records and receipts for any expenses related to volunteer work.
  • Mileage Deduction: You can also deduct mileage driven for volunteer work, though the rate and deductibility might vary.
• Donations Made Through Payroll Deductions
  • Description: Contributions made through employer-sponsored payroll deduction programs.
  • Documentation: Ensure you receive a confirmation or statement from your employer showing the total amount donated through payroll deductions.
  • Benefit: These donations are deducted directly from your paycheck and can simplify record-keeping.

State Sales Tax

State and local sales taxes or local and state income taxes can be written off by taxpayers, which is beneficial in locations whereby there is no income tax.

• Major Purchases
  • Description: Deductible sales tax on significant purchases like vehicles, boats, or other large items.
  • Documentation: Keep receipts or documentation of the purchase and the amount of sales tax paid.
• Renovations or Improvements
  • Description: Sales tax paid on materials used for home renovations or improvements.
  • Documentation: Maintain records of the purchases and associated sales tax, including invoices from contractors or suppliers.

Home Office Deduction

You may be able to claim a home office deduction if you work from home. This deduction lets you write off a percentage of your living expenditures that are specifically related to your business.

• Direct Expenses
  • Description: Expenses that are solely for the home office space.
  • Examples: Office supplies, repairs, and furniture directly related to the office.
  • Documentation: Keep receipts and records of these expenses.
• Indirect Expenses
  • Description: Costs related to the entire home but prorated based on the home office’s share of the total space.
  • Examples: Utilities (electricity, water, internet), mortgage interest, and home insurance.
  • Documentation: Calculate the portion of these expenses attributable to the home office, and keep documentation of the total expenses.

Hobby Expenses

If you engage in activities primarily for personal enjoyment but also generate some income, you might be eligible to deduct certain hobby-related expenses. Nevertheless, these deductions have been severely limited as a result of changes made by the Tax Cuts and Jobs Act, or TCJA, so it’s recommended to speak with a tax expert to learn about the most recent regulations.

• Supplies and Equipment Used in the Hobby
  • Description: Costs for items necessary to pursue the hobby, such as materials, tools, or equipment.
  • Examples: Art supplies for painting, gardening tools for growing plants, or cameras for photography.
  • Documentation: Maintain receipts and records of purchases related to the hobby.
• Costs Associated with Maintaining a Hobby-Related Space
  • Description: Expenses for maintaining a space used for hobby activities.
  • Examples: Utility costs, repairs, or improvements to a dedicated area of your home used for the hobby.
  • Limitations: Deductions for these expenses are generally limited to the income generated from the hobby, and the TCJA has restricted many of these deductions.

Investment-Related Expenses

Certain expenses related to managing investments can be deductible, though some of these deductions have been reduced or eliminated in recent years. It’s important to understand what is still claimable and keep thorough documentation.

• Investment Advisory Fees
  • Description: Fees paid to financial advisors or consultants for managing investments.
  • Examples: Fees for portfolio management or financial planning services.
  • Documentation: Keep detailed records and invoices from financial advisors.
• Safe Deposit Box Fees
  • Description: Costs associated with renting a safe deposit box used to store investment-related documents.
  • Examples: Annual rental fees for the safe deposit box.
  • Documentation: Obtain and keep receipts or statements showing the fee payment.
• Expenses Associated with Tax Planning for Investment Income
  • Description: Fees for tax preparation services specifically related to investment income.
  • Examples: Costs incurred for preparing tax returns that include investment income or dealing with capital gains.
  • Documentation: Keep records of tax preparation fees and how they relate to investment income.

Job Search Costs

Expenses incurred while searching for a new job in the same field may be deductible, though some restrictions apply under recent tax laws. Ensure you maintain proper documentation to substantiate these costs.

• Resume Preparation and Printing
  • Description: Costs for creating and printing resumes or other job application materials.
  • Examples: Fees paid to resume writers, printing costs, or online job application services.
  • Documentation: Save receipts for any professional services used and printing costs.
• Travel Expenses for Interviews
  • Description: Costs incurred for traveling to job interviews, including transportation, lodging, and meals.
  • Examples: Gas or airfare, hotel stays, and meals while traveling for interviews.
  • Documentation: Keep travel itineraries, receipts, and logs of travel expenses.
• Employment Agency Fees
  • Description: Fees paid to employment agencies or headhunters for job placement services.
  • Examples: Charges from agencies that help you find job opportunities or negotiate employment offers.
  • Documentation: Maintain invoices or receipts from the agency services.

IRA Contributions

Contributions to traditional IRAs can be tax-deductible up to specific limits. If you’re not covered by a retirement plan at work, you may be able to deduct the full amount of your contributions.

• Contributions Up to $6,500 Per Year
  • Description: Tax-deductible contributions to traditional IRAs, subject to annual limits.
  • Examples: Contributions up to $6,500 per year ($7,500 if age 50 or older) for the 2024 tax year.
  • Documentation: Keep records of contributions made to your IRA accounts.
• Contributions Made for a Non-Working Spouse
  • Description: Contributions made to an IRA for a spouse who is not employed, allowing for tax-deductible contributions even if one spouse has no earned income.
  • Examples: Up to $6,500 per year for the non-working spouse’s IRA ($7,500 if age 50 or older).
  • Documentation: Maintain records of contributions and documentation proving the spouse’s non-working status.

Comparative table on the most overlooked tax deductions:

Notes:

• Eligibility Requirements: These vary by deduction category and may have specific conditions to be met.
• Limitations: Some deductions have thresholds or caps, and certain tax law changes (like those from the TCJA) can impact availability and amount.

Conclusion

Navigating tax deductions effectively can significantly reduce your taxable income and enhance your financial situation. Here’s a quick summary of the main conclusions:

• Unreimbursed Business Expenses: Employees may still benefit from deductions for business-related costs in specific cases, such as qualified performing artists or educators. Key expenses include home office costs, business mileage, and office supplies.
• Medical Expenses: Medical costs that exceed 7.5% of adjusted gross income are deductible by taxpayers. This includes a range of costs from health insurance premiums to travel expenses for medical care.
• Educational Expenses: Beyond the well-known credits, deductible expenses include student loan interest and certain work-related educational costs.
• Charitable Contributions: Donations of property, out-of-pocket expenses for volunteering, and payroll deductions are often overlooked but can provide valuable tax benefits.
• State Sales Tax: An alternative to income tax deductions is the ability to deduct state and local sales taxes on large purchases and home upgrades in jurisdictions without income taxes.
• Home Office Deduction: For those working from home, deducting a portion of home expenses used exclusively for business can be beneficial. This includes both direct and indirect expenses.
• Hobby Expenses: While restrictions apply, some hobby-related expenses may still be deductible if they are necessary for the income-generating activity.
• Investment-Related Expenses: You can still deduct expenses such as advisory fees, safe deposit box fees, and tax preparation charges associated with investment income, even though some deductions connected to investments have been restricted.
• Job Search Costs: Expenses related to searching for a new job in the same field, including resume preparation, travel, and employment agency fees, may be deductible.
• IRA Contributions: Contributions to traditional IRAs are deductible up to certain limits, and if you’re not covered by a retirement plan at work, the full amount may be deductible.

By being aware of these often-overlooked deductions and maintaining thorough documentation, you can ensure that you take full advantage of available tax benefits and potentially reduce your tax liability. For assistance in customizing these deductions to your unique circumstances and maintaining compliance with current tax regulations, always think about speaking with a tax professional.

FAQs About The Most Overlooked Tax Deductions

What are some examples of unreimbursed business expenses that employees might deduct?

Employees may be able to deduct unreimbursed business expenses such as home office costs, business mileage, and office supplies. However, many of these deductions have been restricted under recent tax laws, so specific eligibility criteria apply.

Can I deduct medical expenses if I have health insurance?

Yes, even with health insurance, you can write off medical costs that surpass 7.5% of your adjusted gross income (AGI). This includes out-of-pocket costs for prescriptions, certain medical treatments, and travel related to medical care.

What types of charitable contributions are often overlooked for tax deductions?

Often overlooked charitable contributions include donations of property (like clothing or household items), out-of-pocket expenses incurred while volunteering, and donations made through payroll deductions.

How can I benefit from deducting state sales tax?

State and local sales taxes may be deductible in place of income taxes if you reside in a state without them. This can include sales tax on major purchases like cars or boats and on home renovations or improvements.

What are some deductible expenses related to managing investments?

Deductible investment-related expenses may include advisory fees, safe deposit box fees, and certain costs associated with tax preparation for investment income. Note that some of these deductions have been limited in recent years.