According to the most recent numbers, 45 million Americans received over $1.2 trillion worth of tax deductions annually. While that is an astounding number, did you know that it could have been even higher if every single person made use of every single concession made to them?
That’s right, being thorough and keeping up-to-date with the tax regulations can help put extra money in your pocket. For instance, since 2018, those who are 65 years or above are eligible to receive higher standard deductions than the younger population. There are so many tax breaks the government has made available, and while you may not be eligible for all of them, you may be missing out on some that may help you pay lower taxes.
Here are the 8 most overlooked tax deductions:
1. State Sales Taxes
Most states around the country have local income taxes and state and local sales taxes which their citizens have to choose either or. Given the choice, the local income tax is often the better deal. But when it comes to states that do not impose an income tax, such as Alaska, Florida, Nevada, and more, you can claim the sales tax deduction on any purchases you made throughout the year.
You can use the IRS tables provided to determine how much you can deduct, and add in any major expenses that occurred during the year, such as homeownership or even buying a boat! Keep in mind that every state has a maximum limit that you can claim, which is typically $10,000 a year.
2. Student Loan Interest Paid by Anyone
In the past, if someone else paid back your student loan, the law did not recognize it as a tax deduction for any of the parties involved. A tax deduction was given only if the actual person who is liable for the debt paid it back. But more recently, the student was made eligible for a deduction no matter who pays it. So, you can get up to $2,500 in deductions regardless of if your student loan is paid back by you, your parents, or even some third party with no connection to you.
3. Reinvested Dividends
While not technically a tax deduction, this is still a way to reduce the tax paid by a lot. Unfortunately, a lot of taxpayers miss this subtraction. Most mutual fund dividends automatically invest in extra shares, and each reinvestment increases the “tax basis” in the stock or mutual fund. Therefore, the investor’s taxable capital gain is reduced when they sell the shares.
Ideally, you should include the reinvested dividends in your cost basis – which is subtracted from the proceeds to sale to determine your gain. Failing to do so is a guaranteed way to pay more taxes than you need to!
4. Small Charitable Expenses
You may have already included the large charitable donations you made during the year through cheque or payroll deduction, but did you know that even small, out-of-pocket expenses that were made on behalf of charity can be written off?
This could be anything from how much the ingredients cost for the cookies you made for the church bake sale or the stamps you bought for the school fundraiser. If you drove your car for any kind of charity or goodwill purpose, you are eligible to deduct 14 cents per mile from your taxes!
5. Child and Dependent Care Tax Credit
A tax credit is even better than a tax deduction because it reduces your tax bill dollar for dollar. So, make sure you don’t miss out on any of these! One such tax credit is the child and dependent care credit. It is often overload because people pay their childcare bills through an automatic reimbursement account at work.
While the maximum expense allowed by the law for a tax-favored reimbursement account through your employer is $5,000, you can claim up to $6,000 for the overall credit. Since $5,000 comes from the account, you can show up to $1,000 more in childcare expenses when it is work-related. To put this in perspective, this can reduce your tax bill by a minimum of $200 when considering a minimum 20% of the expenses. Lower-income households have a higher tax percentage.
6. State Tax You Paid in 2018
If you owed taxes when you filed your 2018 state tax return in 2019, you should not forget to include that amount along with your state tax itemized deduction on your 2019 returns. State income taxes that were withheld from your paychecks or paid via quarterly estimated payments must also be noted. Starting from 2018, a $10,000 limitation has been set on the deductions for state and local taxes.
7. Earned Income Tax Credit (EITC)
Here’s another tax credit – not deduction – that is vastly underutilized. Despite the fact that millions of lower-income households in the US make use of it every year, the IRS says that 25% of taxpayers who are eligible for the Earned Income Tax Credit fail to claim it. Some people miss out because they weren’t aware of it, but some just consider the rules to be “too complicated”.
According to the EITC, you can file for different statuses, which have different amounts ranging from $529 to $6,557. This tax credit is made available to help supplement the wages of lower-income individuals, but the major difference in recent years is that most people who were classified as “middle-class” in the past are now being considered “low income”. This could be because they either lost a job, took a pay cut, or worked fewer hours over the past year. Even many white-collar workers are now eligible for this tax credit.
The exact amount of EITC will depend on a variety of factors from your income to marital status. You can file a tax return to get a refund from the EITC, even if you don’t owe any taxes. Moreover, if you had been eligible for the credit in the past years but didn’t claim it, you can still get a refund for up to the previous 3 years.
8. Jury Pay Paid to Employer
When serving on a jury, you are paid a certain fee per day that you appear in court. Most employers continue paying their employees the full salary despite the number of days missed due to jury duty, but they do ask that the jury fees are submitted to the company.
While this seems like a fair trade, unfortunately, these fees are considered taxable income. But if you do give your employer the money, you are eligible for a deduction since this money is simply passing through your hands.
