As Americans fire up their laptops and desktops to get another e-filing tax season underway, they might overlook something as old as tax time itself: savvy tax deductions that can coax a smile as you file.
Take a look at the six most important tax deductions you should claim this tax season as you get ready to crunch the numbers. You’ll be surprised by how much you can save on your tax bill.
1. Mortgage Interest Deduction
The mortgage interest deduction applies to both primary and secondary homes, said Mark Jaeger, director of tax development for TaxAct, a tax preparation software company. He added that the deduction can also apply to second mortgages and home equity debt up to $100,000 (or $50,000 if spouses file separately).
According to the IRS, taxpayers can deduct home mortgage interest if they meet two conditions:
- First, they must file a form 1040 and itemize deductions on Schedule A
- Second, the mortgage must be secured debt on a qualified home that an individual owns.
“Secured debt means you have put your home up as collateral to protect the interests of the lender,” Jaeger said. “Should a taxpayer not be able to pay the debt, the home can then serve as payment to the lender to pay back the debt.”
2. Student Loan Interest Deduction
If you are drowning in student loan debt, this deduction offers a life raft. “The amount is claimed as an adjustment to income, and the amount available to deduct is the lesser of $2,500 or the amount of interest actually paid,” Jaeger said.
However, he added, the amount of the deduction gradually decreases and phases out if the taxpayer’s modified gross income is more than $80,000, or $160,000 for married couples filing jointly. To claim the deduction for 2015, you need to meet the following conditions:
- You have paid interest on a qualified student loan in tax year 2015.
- You are legally obligated to pay interest on a qualified student loan.
- Your filing status is not married filing separately.
- If filing jointly, the taxpayer or his spouse cannot be claimed as dependents on someone else’s return.
- The loan was taken solely to pay qualified higher education expenses.
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3. Real Estate Taxes Deduction
Homeowners can use one form of tax to offset another. “Remember to deduct real estate taxes paid on real property you own — including state, local or foreign taxes,” said Melinda Kibler, a certified financial planner and portfolio manager with Palisades Hudson Financial Group‘s office in Fort Lauderdale, Fla.
To claim the deduction, make sure the taxes are based on the assessed value of the property.
“If your real estate taxes are paid through your mortgage provider, be sure to check your Form 1098 for the real estate taxes portion,” Kibler said. “If you pull your real estate taxes from your county records, you may note there are portions broken out for ad valorem and non-ad valorem amounts.” For tax purposes, use the ad valorem number, which is the assessed value of real estate or personal property.
4. Tax-Loss-Harvesting Deduction
Simply put, tax-loss harvesting is selling securities at a loss to offset a capital gains tax liability. That might sound a bit odd, but consider that the loss incurred is only temporary once you know how loss harvesting works — think of it as akin to harvesting apples but not cutting down the tree.
Mike Piershale, president of Piershale Financial Group in the greater Chicago area, cited a real-life example of loss harvesting in action. A retired client had triggered approximately $20,000 of long-term capital gains.
“I then looked at her investment statements and saw where she had approximately $30,000 in unrealized losses from a group of stock mutual funds that were down in value,” Piershale said. He noted that she could have moved her money out of the mutual funds, waited 31 days to abide by the IRS’ “wash sale rule” and then moved her money back into the same mutual funds.
“She then would have been able to declare a $30,000 capital loss, which she could have used to offset the $20,000 in capital gain … It would have dropped her federal income tax by $3,750,” Piershale said.
5. Flexible Spending Account Deduction
A flexible spending account, or FSA, is a pre-tax benefit used to pay for eligible medical, dental and vision care expenses that are not covered by your insurance plan or elsewhere. This includes deductibles and co-payments connected to your health insurance expenses.
This is one of the best tax-saving perks that employers offer, as it allows you to sock away up to $2,550 per year and not pay a cent of taxes on it. Some employers will even contribute to your plan.
FSAs carry certain conditions, however. The most important is that you must spend all the money in the account by the end of the calendar year, or you will lose whatever you do not use. Some employers, though, will allow you to carry over up to $500 in the following year, according to Healthcare.gov.
WageWorks, a company that administers FSAs, has a calculator that can help you figure out the tax benefit of your account.
6. Charitable Contribution Deduction
Some people leave a sack of shoes at the Salvation Army and walk away feeling good. Others track everything they give and make the most of it on their tax returns.
“Whether you dropped off a bag of clothing at a local charity or donated $5 at the cash register of your grocery store, you should be tracking all of these contributions to ensure you get the highest tax benefit possible,” Kibler said.
Kibler added that if you own appreciated securities in a taxable investment account, you should consider contributing those as opposed to cash because this allows you to sidestep paying capital gains taxes on the amount you give. Deductions for contributions of long-term appreciated securities to public charities are typically limited to 30 percent of the taxpayer’s adjusted gross income.
You can even deduct money donated straight from your retirement savings, provided you are older than 70 ½. “You can deduct up to $100,000 in charitable payments directly from your IRA,” said Grafton “Cap” Willey, the Providence, R.I.-based managing director at CBIZ Tofias and Mayer Hoffman McCann, an accounting, tax and consulting provider. “The ability to do this was set to expire at the end of 2014 but was permanently extended this December.”/p>
Willey added that this deduction qualifies as part of your required minimum distribution but is excluded from adjusted gross income. “You might view this as a wash on your tax return, but in many cases it can be beneficial and can save some taxes,” he said.
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As you continue to work on filing, be sure to make the rounds and ask a lot of deduction-related questions of your trusted friends, business associates and accountant. Do not assume your tax pro is aware of everything you can claim. The more details you communicate about your financial situation, the more a pro can do for you.