Tax deductions often get a bad rap. They are sometimes associated in the media with high-income earners looking for ways to avoid paying their responsibilities. However in truth, deductions are a valid tax adjustment provided for in both federal and state tax laws for taxpayers. When used correctly, they help reduce a filer's tax liability legally and should be taken advantage of when possible. To do otherwise is simply giving the government a free donation at your expense via higher taxes paid.
Interestingly, some deductions are missed far more than others. Most people use some form of the standard deduction or reach a similar outcome with their own itemized deductions. And homeowners are quick to use their mortgage interest and property tax deductions. However, other deductions are available that, together, can add up up to sizable adjustments. Here are five common deductions that are often missed:
1. State Sales Taxes
If you bought a big item like a home, a boat or a new car in the past year, you likely paid state sales tax this past year as well. That amount can be deducted from your federal taxes, but many Americans forget because the paperwork happened in one day versus repeatedly throughout the year. You can't claim state income tax and state sales tax in the same tax year; you have to choose which one is the higher amount for your deduction and go with a single choice. For residents in low tax states such as Florida and Tennessee or for retirees, for example, sales tax will likely be your choice. However, for residents in higher tax states, state income tax can be an attractive deduction when it applies. When you deduct state income tax, you can use the amount prescribed by the IRS or go with the actual amount (provided you have the records).
2. Student Loan Interest
Even if you are not in school anymore, the interest you are paying on your student loans may be deductible. The official IRS rule is that student loan borrowers can deduct up to $2,500 of the interest they paid directly from their taxable income. With the average student debt load in the United States now in the tens of thousands of dollars at graduation, you could be looking at a tax savings of $200 to $600, depending on how your loan amount. Keep in mind that in order to qualify for the Student Loan Interest deduction, your adjusted gross income cannot exceed $65,000 ($135,000 for couples) 1
3. Changing Jobs
If you moved last year in order to change jobs and take on new employment elsewhere, your moving costs are deductible. You need to have clear receipts for what you paid in your file, but it's a valid deduction to reducing your income tax liability. The 2017 Tax Act has removed this deduction, however.
A charity deduction applies to more than just the check you wrote to a local church or non-profit organization. Physical items that you donated such as clothes, furniture, and tools count as well. You will need to have written documentation listing their value (to what typical market value for such items is used, not new), but the amount adds up if you donated frequently. Of course, receipts are the key documentation to have for such donations as proof.
5. Mortgage Refinancing and Paying Points
If you refinanced your mortgage and paid points to lower your new mortgage interest, the amount paid may be a deduction (it depends on the life of your loan). For instance if you have a new 30-year mortgage, then you can deduct 1/30 of the points value from your current year tax filing. It may not seem like much alone, but add the figure to your other deductions and the dollars add up fast.
6. Medical Expenses
If you were hospitalized or even simply had high-cost dental, vision or other medical care this year, you'll want to keep those receipts. In general, you can deduct qualified medical expenses that are more than 7.5% of your adjusted gross income for that tax year (2018). With healthcare costs so high, this deduction can represent a real tax savings. Just keep in mind that any medical expenses for which you are reimbursed by your insurance company, cannot be deducted. Also, you must itemize your deductions to qualify for this benefit. Starting in 2018 with the higher standard deduction, the medical expense will less likely be used.
A quick way to see which deductions are possible for you is to run your taxes through a home tax software program available online or work with a professional that focuses on tax advice. While it may be too late to do tax planning for 2017, you can work with a tax-focused financial planner for 2018 and beyond. Deductions are likely to be maximized should you put some efforts into proactively planning for the year.
This content is developed from sources believed to be providing accurate information. The information in this material is not intended as investment, tax, or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.