Commonly Overlooked Tax Deductions That Will Save You Money

The IRS is always on our minds, well, at least for me. We should be thinking about them more than ever before. The agency that governs taxation could end up taking a big chunk of your paycheck if you don’t take advantage of these commonly overlooked tax deductions.

You are likely paying more than necessary for your taxes, and there’s no reason you should continue!

Consider claiming these tax credits and deductions that most taxpayers miss.

Overlooked deductible costs associated with charity

There are different types of charitable donations. You have your out of pocket cash donations as well as your non- cash donations. Both are tax-deductible as an incentive to benefit the act of good deed.

Let’s dig deeper below.

Out-of-pocket charitable donations.

When donating to charity, out-of-pocket donations are most common. People write checks to their most valued charities to keep their doors open and support a good cause. Helping those in need is one aspect of it but you’re also rewarded with favorable tax benefits. You can use the standard deductible amount of $300 for single filers or $600 if married filing jointly.

If you’re not using the Standard Deduction and decide to itemize, you can write off the full dollar amount of your charitable donations.

As best practice, always make sure you’re collecting receipts from qualified charitable organizations. These receipts are required for single donations of $250 or more. Do note, anything below the $250 threshold does not require a receipt.

However, if you have multiple donations, keep a log of the amount and the organization you donated to throughout the year so you can claim those out-of-pocket donations.

Non-cash charitable donations

Now that we all know to deduct the checks we write for our favorite charity, most of us forget to deduct other donations. Items like automobiles, medical donations, and clothing can be deducted as well; you’ll need receipts if an audit comes around, so make sure they stay close!

Charitable Travel Costs

You can deduct travel costs associated with volunteer work to a charity. Keep mileage logs and records of your travel expenses such as bus fares, gas, and airfares. This will help substantiate claims if the IRS comes knocking on your door.

Self-Employment and Business Expenses

If you are self-employed or have a small business, you may qualify for numerous deductions. The cost to conduct business is deductible so long as it’s ordinary and necessary. These are subscriptions, web design, professional services, home office expenses, equipment, materials, and so much more.

Self-employed and business owners can also take advantage of the QBI deduction. The Qualified Business Income deduction (QBI) allows eligible self-employed and small business owners to deduct 20% of their qualified expenditures on their tax returns. To qualify, self-employed individuals and small businesses must earn less than $164,900. If filing jointly, they must earn less than $329,800 annually. Be sure to consult with a tax advisor to understand qualifications better and avoid overlooking necessary business tax deductions.

Mortgage Refinancing Points

You can deduct points from your taxes if you’ve refinanced. In many cases, they are deducted over the life of the mortgage. They’re great for an extra deduction each year, even though it isn’t much. If you get audited, you’ll need receipts, so keep track of what you spent during the year. Remember, audits can happen anytime, so being prepared might help avoid any unpleasant surprises down the line.

Commonly Missed Tax Deductions for Medical Expenses

Medical insurance premiums

You can deduct the cost of your medical insurance premiums if you spend more than 7.5% of your income. However, if you’re self-employed, you can deduct 100% as long as you meet specific criteria.

Medical Smoking Cessation Costs

If you’re looking to break your nicotine habit and want the benefits of doing so as cheaply as possible, consider joining a smoking cessation program. You could deduct the costs through medical expenses related to quitting cigarettes. You can also deduct prescriptions like bupropion hydrochloride or varenicline tartrate—both of which are used during withdrawal.

Wigs for medical purposes

Suppose you need a wig for medical reasons, like alopecia areata or cancer treatment side-effects that cause your hair to fall out. In that case, you can claim it as an eligible expense on taxes! Be sure to ask your doctor for a letter stating that they recommend the wig for your records.

Costs incurred for Breastfeeding Equipment and Pumps

Many moms miss out on this deduction because they either forget to tell their tax preparer or don’t know about it. Medical expenses can include breastfeeding equipment and breast pumps to help with lactation issues. These products can be very costly, so deducting them can help increase tax savings or boost your paid medical expenses to the 7.5% threshold. This deduction is itemized on Schedule A, line 3.

Plastic Surgery Tax Deduction

IRS allows you to deduct the cost of plastic surgery if necessary to improve or correct a deformity resulting from trauma, disfiguring disease, or an accident. In other words, plastic surgery must be medically necessary to be a tax-deductible cost.

For example, a medically necessary surgery can be breast reconstruction surgery to remove cancerous tissues. The costs associated with your surgery can be deducted as a medical expense on your Schedule A, 1040 return.

Energy Savings Home Improvement

Another most often overlooked tax deduction is home improvements for energy savings. You may be able to save 30% on your taxes by making energy-saving improvements at home, and you will get credit for the cost of these projects. This means you not only save money with this reduction in utility bills but also have extra savings on your tax bill!

Child and Dependent Care Costs

Suppose you paid for the care of a qualifying individual so that you could work or actively look for employment. In that case, you can claim the child and dependent care credit. This allows individuals who qualify with their spouse (or joint return) an extra tax break not available otherwise!

Retirement tax credit

There are tons of benefits when contributing to a retirement plan. One big reason it’s so important is that the contributions are typically tax-free at time-of-contributions. This means that if you have an income below certain levels, you may receive up to 50% of your contribution credits towards your tax liability.

Penalty on Early Withdrawal of Savings and Retirement Plans

An often highly missed tax deduction is early withdrawals on savings accounts. You can take cash out of a certificate of deposit (CD) or another time-deposit savings account before it matures, but you’ll almost certainly be charged a penalty. Your CD deposit typically offers a higher interest rate than a regular savings account.

Retirement plans also face penalties for early distributions. If you withdraw from your retirement plan, you may be subject to income tax and an extra 10% tax.

The penalty for taking money out of savings and retirement plans can qualify to be deducted from your tax return. It is regarded as an “above the line” adjustment to income. It is one of the more valuable missed tax deductions available. The penalty for early withdrawal is deductible, according to the IRS, because it reduces the amount of interest you’ll earn.

Federally Declared Disaster Areas

The IRS has various tax law provisions that can help taxpayers and businesses recover financially from the impact of disasters, especially when they are federally declared. These laws allow for additional time to file returns or pay taxes and grants refund payments more quickly than usual.

According to the IRS, your home may qualify if you live in an area eligible for major disaster status. This means no income tax will be due until afterward if you experienced casualty losses such as a fire or a similar event.

Gambling Losses to the extent of winnings

You can subtract gambling losses to the extent of gambling winnings. To prove your losses during an IRS audit, keep receipts of both your winnings and losses. You can also keep a diary listing dates and amounts of each loss and gain. You can report itemized losses on Schedule A of your 1040 tax return. See IRS for more info.

Sales and Income Taxes

A commonly overlooked tax deduction is sales and income tax deductions. You can save more money on your taxes by including all the state sales tax you have paid during the year. If there isn’t an income tax in effect for residents of a given state, then adding up sales taxes from major purchases towards taxation can add up!

As of today, 9 states doesn’t report State income tax, and those States include:

Alaska
Florida
New Hampshire

Nevada
South Dakota
Tennessee

Texas
Washington
Wyoming

According to the IRS, the total deduction for state and local income, sales, and property taxes is a combined $10,000 limitation and $5,000 if MFS.

How much can you save? The Sales Tax Deduction Calculator helps value your State and local general sales taxes. It allows you to calculate the correct amount when it comes time to itemize deductions on Schedule A (Forms 1040 or 1040-SR).

Frequently Missed Credits for College Tuition and Training Costs

You can deduct college tuition, training expenses, and costs related to higher education. However, there are exceptions, such as room and board. You can claim these credits through the American Opportunity Tax Education Credit or the Lifetime Learning Credit.

American Opportunity Tax Credit

The American Opportunity Tax Credit was designed to help students afford higher education expenses. The maximum yearly credit is $2,500 for each eligible student, and if you owe no taxes, then 40% can be refunded as a tax refund which can be up to $1,000. You can claim this credit for a maximum of 4 years. Anything beyond the 4 years will result in IRS recalculating your tax refund or an IRS audit.

Lifetime Learning Credit

On the other hand, the lifetime learning credit allows taxpayers to deduct $10,000 every year with no limit. The maximum a taxpayer can receive as credit is $2000.

Interest Paid on Student Loans

You can claim interests paid on student loans as an adjustment to income on Schedule 1 of your 1040 tax return. The deductible amount is limited to $2,500 or the total interest paid, whichever is less.

Military Reserve Travel Costs

Like business owners, Military Reservists can deduct traveling expenses incurred for reserve duties if the taxpayer traveled more than 100 miles away from home. Deductions can include travel fares such as plane tickets, bus tickets, or mileage, along with meals, lodging, and incidental expenses.

Deductible expenses are allowed so long as your employer did not reimburse you or provide free alternatives. Make sure to keep receipts or a log detailing the dates, costs, location, and reason for the expense. Click here to download a free expense report. If you cannot gather receipts or keep a detailed long, visit www.gsa.gov/perdiem for daily allowable deductions by State.

Frequently Asked Questions Q&A

What happens if you miss a tax credit?

If you missed a tax credit or deduction, you could file an amended return to claim those credits. Filing an amended return allows you to reduce your tax liability or receive a higher refund for that particular tax year. You can file an amended return within three years of the date the return was processed. However, there are exceptions to that rule. You have seven years to amend the return if you correct a tax debt or claim a foreign tax credit.

How Long Can tax credits be carried forward?

Tax credits can carry forward 5, 10, or even 20 years. However, it depends on the credit itself. For example, charitable contributions can carry forward five years. Yet, a foreign tax credit can carry back one year and carry forward ten years. Lastly, unused business credits carried back one year can carry forward 20 years.

What happens if I file my taxes late but don’t owe?

There is a failure-to-file penalty of 5% per month for late filing, up to a maximum of 25%. If you don’t owe any taxes, you won’t have to pay the penalty. However, if you ended up owing money and didn’t file on time, penalties are added on top of what you owe. In addition, there may be interest charges assessed on top of the penalties. So it’s always best to file your taxes on time, even if you don’t think you owe anything.

Can I file 2 years of taxes at once?

Yes, you can file two years of taxes at once. However, you will need to gather all your relevant tax documentation for both years and prepare them as separate filings. Note that if you are claiming a tax refund for more than three years, you may not receive a refund for years that exceed the three-year limitation. The IRS usually doesn’t provide refunds on tax returns filled past that timeframe.

How can I get a bigger tax refund?

You can get a bigger refund by tax planning or keeping track of your expenses. That way, you can claim deductions like the ones listed above. Also, hire a tax professional to assist with tax filings. Professional tax preparers constantly monitor the changes throughout the year to pinpoint tax savings that benefit your particular situation.

What disqualifies you from earned income credit?

You are disqualified from the earned income tax credit if you’re not a US Citizen or resident alien, make above the EITC income threshold, or receive foreign income.

The earned income credit is available to qualified taxpayers who have earned income during the taxable year.

To qualify for EIC, you must meet specific requirements, including but not limited to the following:

You must have earned income.

Must file a tax return.
Investment income cannot exceed $10,000.
Your earned income cannot exceed $57,414

Must have a valid social security number
You have to be a resident alien or US citizen for the entire year
You cannot file form 2555, which is the foreign earned income

Visit the IRS website for more information on these and other requirements,

Can you get a tax return with no income?

Yes, you can get a tax refund with no income. To do so, you must file a $0 return. This can be beneficial if you have children and claim the Child Tax Credit. You can also file a $0 return if you did not receive the Recovery Rebate Credit, also known as stimulus check. Sometimes a $0 tax return is an excellent way to prevent fraudsters from using your social security number to file a fraudulent return.

Conclusion

Most people commonly overlook tax deductions when they file their income tax returns. It may be a lack of knowledge or forgetting they qualified for certain credits or deductions. Let’s face it, a tax return is a summary of what you did and paid for throughout the year. If you forget to document or keep receipts of things you’ve done at the beginning or mid-year, you might forget.

Above are tax write-offs you shouldn’t miss. You may want to hire a tax professional who can guide you through the tax credits available. As the preparer is probing your situation, they may end up discovering credits you didn’t know existed. Visit our service page to inquire about our Accounting, Bookkeeping, or Tax services.

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