You can save money on your income tax by claiming all of the write-offs that you’re allowed. However, many people miss out on great tax savings because they don’t know about certain tax breaks. If you don’t find out about them before the deadline for amended returns has passed, you will not be able to take advantage of them
If you want to avoid paying too much tax, then take a look at our list of twenty tax breaks and deductions that people frequently overlook. You may find a hidden gem that reduces the amount of tax you have to pay this year.
No. 1: Check Whether You Really Need To Report A Refund From State Income Tax
If you get a state tax refund, you will get a 1099-G form from the state reporting the amount of the refund. The IRS will expect you to report the refund on your federal return, and if you don’t report it, there are penalties. But reporting a state tax refund you don’t owe means unnecessary paperwork, and a higher chance of getting audited. Plus, if you report the refund because it helped you get over the standard deduction threshold, then part of it is tax-free anyway. If you didn’t itemize deductions on your previous federal tax return, there’s no need to report the state income tax refund. So before you report your state refund on your federal return, take a few minutes to consider whether you actually have to.
No. 2: Volunteer Work And Charitable Deductions
There are many different ways to make charitable gifts, from donating money or stocks to giving your time and effort to a cause that matters to you. While many people choose to give by writing a check or making a donation through payroll deduction, there are other options as well. Remember to include your charitable contributions on your tax return. For example, if you incur out-of-pocket expenses while doing work for a charity, like buying ingredients for dishes you cooked or purchasing stamps for incoming mail, you can typically claim these expenses on your taxes as long as you keep your receipts. Additionally, if you volunteer for a charity by driving somewhere on behalf of the organization, you can deduct 14 cents per mile of travel in order to make things more affordable. Whatever form your charitable donations take, it’s important to remember to include your efforts on your tax return.
No. 3: State-Level Sales Tax
Whether you live in a state with high-income taxes or without, deciding between state sales taxes and state income taxes can be tricky. Ultimately, the decision will depend largely on your individual tax situation and your projected income for the coming year. Many people opt for state sales taxes, since you don’t need to keep track of your spending or retain receipts for things like cars, boats, or airplanes that may be subject to additional sales taxes. For example, if you’re considering a big purchase like a new car, you can use the IRS sales tax calculator to estimate how much you’ll pay in additional local and state taxes.
Overall, while state income taxes may seem like a more straightforward option at first glance, it’s important to carefully consider both sides before making a final decision. In some cases, opting for a state sales tax may ultimately save you money in the long run. But whatever option you choose, it’s crucial to take all of your financial factors into account when deciding which is best for you.
However, it’s important to remember that you can only claim a certain amount for each deduction. For example, the maximum amount that you can deduct for sales tax and local property tax is $10,000. So, if you’re planning on claiming deductions for both of these taxes, you’ll need to make sure that the combined total is no more than $10,000. Otherwise, you’ll face a penalty from the IRS. Fortunately, as long as you’re aware of the limit, there’s no reason why you can’t take advantage of both deductions and save yourself some money come tax time.
No. 4: Money Lost Gambling
Many people don’t realize that you can deduct gambling losses from your taxes. This includes money lost at a casino, racetrack, bingo hall, or any other type of gambling activity. There are a few things to keep in mind, though. The first is that you can only deduct gambling losses up to the amount of your winnings. So if you won $1000 at the casino, you can only deduct $1000 in losses. The second is that you have to itemize your deductions in order to claim them. This means keeping track of all your gambling activity and having receipts to back it up. Finally, it’s a good idea to keep a diary of your gambling activities. This will help you remember how much you lost (and won) and make it easier to itemize your deductions.
No. 5” Last Spring’s State Tax
If you owed taxes last year, you can claim that amount on this year’s federal tax return. This is a valuable deduction that can save you money, so don’t forget to include it. You can also claim amounts that were estimated and paid quarterly, as well as amounts withheld from your pay. However, deductions are limited to $10,000 a year ($5,000 if married filing separately). So be sure to keep track of your deductions and make sure you don’t exceed the limit.
No. 6: Jury Duty Pay
At many companies, employees who serve on juries are either paid their full salary by the employer, or given quid pro quo benefits in exchange for the juror pay that they provide to the company. Regardless of which approach an employer takes, it is important for employees to be aware that jury compensation is considered taxable income and must be reported as such on their taxes. Furthermore, if an employee chooses to give some or all of his or her jury pay back to the company, this amount can typically be deducted from assessable income.
No. 7: Credits For Childcare
When it comes to saving money on your taxes, a credit is always better than a deduction. A deduction simply reduces your taxable income, which means you’ll save a certain percentage based on your tax bracket. For example, in the 24% bracket, a $1 deduction is worth 24 cents. But a $1 credit is worth $1. That’s because a credit reduces your tax bill dollar for dollar. And when it comes to childcare costs, you can get a tax credit of up to 35% of those costs while you work. So if you’re looking to save money on your taxes, be sure to take advantage of credits rather than deductions.
An even better option is a childcare reimbursement account. This type of account allows you to pay for childcare expenses with pre-tax money, reducing your taxable income and saving you money in the process. Plus, since these expenses don’t incur federal income tax or the 7.65% federal payroll tax, they offer even more savings than other options like a traditional flexible spending account or tax credits. Best of all, this option is available for children up to 13 years old, meaning that you can rely on it for several years before your child starts higher education. So if you’re looking for an affordable way to manage your family and work responsibilities, a childcare reimbursement account is definitely the way to go.
It is important to be mindful of double-dipping. Double-dipping occurs when you claim the same expense twice, either in the form of a reimbursement account or as a tax credit. Obviously, this can have negative consequences for your overall tax bill, so it is essential to be careful and watch out for any double-dips.
One way to prevent this is to carefully consider both the limits and specifications of each type of childcare deduction that can be applied. For example, the maximum amount that you can contribute to a reimbursement account each year is $5,000, while the maximum credit that can be claimed is $6,000. In some cases, you may also be able to claim an additional $1,000 if it is applied as a tax credit rather than as part of your typical tax liability. Depending on your tax situation, this could end up reducing your bill by up to $200 or more.
It is important to keep these key differences in mind when managing your childcare expenses. Whether you choose a reimbursement account or a tax credit and whether you claim the extra $1,000 as part of your regular liability or as a separate credit are all choices that can save you money on your taxes.
No. 8: Dependant Credits
The $2,000 child tax credit has been a lifesaver for parents for decades. Unfortunately, it only applies to children under 16. However, there is a separate $500 credit for dependents who don’t qualify for the child tax credit, which includes older children in college and older relatives at home. The combined total of the child credit and the dependent credit is phased out for gross incomes more than $200,000, or $400,000 for married couples filing jointly. This means that if you’re a single parent with two kids in college, you’re only getting a $500 tax credit. Nevertheless, the child tax credit is a valuable tool for families across the country.
No. 9: Baggage Fees
For anyone who is self-employed and travels for business, the cost of travel can quickly add up. Between airport baggage fees, online booking fees, and fees to change travel plans made at the last minute, these costs can easily eat into your profits. However, these expenses are also tax-deductible, which means that you can bring down your overall tax burden by claiming them on your tax return. Whether you’re flying to a conference or driving to meet with prospective clients, it is always important to keep your travel expenses in mind when doing your taxes. With the right planning and some careful record-keeping, you can save yourself some serious money on taxes – all while ensuring that your business stays on track. So if you are self-employed and travel regularly for business, don’t forget to take those pesky little expenses into account when filing your taxes! After all, every dollar counts in the world of self-employment.
No. 10: Reinvest Your Dividends
Trying to reduce your taxes can feel like a daunting task, but there are actually a lot of small things you can do that will add up over time. For example, if you have mutual fund dividends set up to automatically reinvest in more shares, each purchase increases your tax basis. That means that when you redeem shares, your taxable capital gain is reduced or your tax-saving loss is increased. It’s a small thing, but it can make a big difference down the line.
Dividends are a great way to boost your investment returns, but you need to be careful about how you reinvest them. If you forget to include reinvested dividends, you could end up paying taxes on them twice – once when they were reinvested and again when you sell the shares. That’s why it’s important to keep track of your tax basis. The tax basis is the original value of an asset for tax purposes. If you don’t know the tax basis of shares redeemed, ask the fund. Shares bought after 2011 must have their basis reported to the IRS and to investors. So don’t make the mistake of forgetting to reinvest your dividends. Keep track of your tax basis and reinvest wisely!
No. 11: Taxes Paid On Social Security
One of the perks of being your own boss is that you get to take advantage of some great tax deductions. Specifically, you can write off 7.65% of your total Social Security and Medicare taxes when filing your taxes. This deduction doesn’t apply to employees who share half of their Social Security and Medicare tax burden with their employer, but it can be a great way for self-employed individuals to save a bit more on their taxes. Whether you’re a freelancer, small business owner, or just someone who works for themselves on the side, this is definitely something worth considering when filing your taxes.
No. 12: Property Refinancing Points
Another crucial factor when buying a house is the issue of points. A point refers to a percentage of your total mortgage amount that gets deducted upfront in order to reduce your interest rate. Typically, the more points that you buy at once, the lower your overall interest rate will be.
When you buy a house, you can deduct all the points from your tax return at once. When you refinance, you can deduct the points over the life of your mortgage. This comes out to $33 per year for every $1000 point on a 30-year loan. It’s not much, but it’s better than nothing. If you refinanced for home improvements, you can deduct the points at once.
When you pay off the loan, you can deduct all the remaining points. However, there are also certain exceptions – for example, if you refinance your home loan with the same lender that issued the original mortgage, then the deductions for any remaining points must be spread out over the new term of the loan. So while it may not seem like so important at first, remembering to deduct these points can save you money in the long run.
No. 13: Private School Fees
In the 2017 tax reform law, you are now able to pay your child’s private school tuition from savings accounts previously used only for college tuition. The law allows people to take out $10,000 from their 529 savings plans each year to pay for tuition at religious and other private schools for students in kindergarten through 12th grade. You can use money from multiple 529 plan accounts to pay for tuition, but the total amount you use can’t be more than the annual limit.
If you’re planning to send your child to private school or are already paying tuition for them, it’s important that you take advantage of this tax benefit. By withdrawing money tax-free from your 529 savings plan, you can save a significant amount of money on your income tax return. And with so many different 529 plans available today, you can easily choose one that fits your needs and budget.
No. 14: The American Opportunity Credit Tax Break
When it comes to paying for college, most people have to worry about more than just tuition costs. There are a variety of expenses related to higher education that can quickly add up, from textbooks and housing to transportation and food. But one tax break that many students may be missing out on is the American Opportunity Credit, which offers a valuable refund or reduction in tax liability for qualifying college expenses.
This credit can provide significant financial relief for students who are currently paying for college or those who may be starting classes in the near future. To qualify for the full $2,500 annual maximum credit, you must be earning less than $80,000 per year as an individual or under $160,000 as a couple filing jointly. Additionally, only qualified educational expenses such as tuition and fees can be claimed when determining eligibility. And if your total tax liability is less than the amount of the credit you’re eligible for, you may be entitled to a refund on any remaining balance. So if you’re currently enrolled in or planning to attend college soon, don’t miss out on this valuable tax break – it could make a big difference in reducing the overall cost of your education.
No. 15: The Lifetime Learning College Credit
College credits are not just for people in college. Thanks to the Lifetime Learning credit, you and your spouse can offset the cost of college by claiming a 20% tax credit on your educational costs up to a maximum benefit of $2,000 per year. This benefit is valid for any course or program that improves your job skills, whether it’s a community college course or a vocational school. In addition, the lifetime learning tax credit is available to anyone with an annual income below $58,000 or below $116,000 for couples. For those with incomes above these thresholds, the benefit begins to phase out, but it still remains available to many individuals and families. So if you’re interested in pursuing further education or improving your professional qualifications, look into using the lifetime learning credit to offset some of the costs involved!
No. 16: Student Loan Interest Paid For You By Your Parents
It is generally accepted that parents have a responsibility to support their children financially, whether during childhood or as young adults. However, when it comes to student loans, the IRS is not always so understanding. Under IRS guidelines, a parent who pays back a child’s student loan may only be able to claim certain tax credits if they are legally required to repay the debt. In these cases, the IRS typically treats parents paying back these loans as if they were giving money directly to their child, who in turn pays off the loan.
In order for children to be eligible for a deduction on interest paid by their parents, they must meet several conditions. First, they must not be claimed by anyone else on tax returns as a dependant. Additionally, they must pay enough interest that the total amount exceeds $2,500 per year; otherwise, there will be no benefit afforded to them through this deduction at all.
No. 17: Self-Employed Medicare Premiums
If you have a job, your employer is required to withhold money for Medicare taxes. If you’re self-employed, you pay the full Medicare tax yourself. The current Medicare tax rate is 2.9% of your net earnings from self-employment. You also pay a 0.9% surtax on earnings over $200,000 if you’re single or $250,000 if you’re married and filing a joint return. These amounts are reported on Schedule SE (Form 1040), which is used to calculate your self-employment tax.
If you’re self-employed and qualify for Medicare, you can deduct your Medicare premiums – including Medicare Part B and Part D, Medigap policies, and Medicare Advantage plan premiums. These deductions don’t have to be itemized, and they’re not subject to the 10% of the AGI test that applies to other medical expenses. If you also have a job, you can’t deduct premiums paid in months when your employer or spouse’s employer offered an employer-subsidized health plan. Note that this deduction is only available if you’re self-employed; if you’re an employee, your Medicare premiums are deducted from your pay-check pre-tax.
No. 18: Savings For The Newly Retired
As many people know, the tax system in the US operates on a pay-as-you-earn basis. While some taxes are deducted directly from your income, others must be paid through withholding or estimated tax payments throughout the year. To avoid underpayment penalties, you must typically pay at least 90% of your total tax liability for the year. Alternatively, you can pay either 100% of your total tax liability for last year, or 110% if you earned more than $150,000 during that same time period. However, there is one little-known exception to this rule for people who are aged 62 or older. If you retire at age 62 or later and intend to continue working full time in the following year, you may be able to request a penalty waiver by filling out IRS Form 2210 and sending it to the IRS before the end of that year. So if you’re nearing retirement age and looking to save money on your taxes, be sure to consider this little-known exception!
No. 19: Travel Expenses For Military Reservists
While most taxpayers are only able to deduct standard expenses like mortgage interest and charitable donations, military reservists may be able to deduct a wide variety of costs associated with their service. For example, reservists can deduct the cost of travel to and from training, as well as the cost of uniforms and other necessary equipment. In addition, reservists can also deduct the cost of childcare while they are away on duty. As a result, military reservists can save a significant amount of money on their taxes each year. However, it is important to keep meticulous records in order to take advantage of these deductions. When in doubt, consult with a tax professional to ensure that you are taking all the deductions you are entitled to.
No. 20: Amortizing The Premiums Of Bonds
When you purchase a taxable bond for more than its face value, the IRS will help you pay the premium. You can deduct the premium as interest on your tax return. The different options available are as follows – You can deduct the premium in the year you pay it; you can spread the deduction over the life of the bond, or you can elect to amortize the premium. You can potentially reduce your tax liability by electing to amortize the premium. Amortizing the premium reduces your taxable income in the year you purchase the bond and spreads the deduction over the life of the bond. When you spread the deduction over the life of the bond, you are effectively paying less interest on your loan. This will save you money in the long run.
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