Are You Leaving Money on the Table? 5 Tax Deductions Most People Miss
Written by
Josephine Nesbit
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Jenna Klaverweiden
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Tax deductions reduce your taxable income to help lower your overall tax bill. While most people claim the standard deduction, there are dozens of lesser-known opportunities that could help you keep more of your money at tax time.
According to H&R Block, some of the most common deductions are ones you take “above the line” that reduce your adjusted gross income, which can be claimed even if you take the standard deduction. Others are considered “below the line” and can be used only if you itemize your deductions.
According to tax experts, these are some of the most common tax deductions many people miss.
Also see three ways to maximize your tax deduction if you’re itemizing.
1. Medical Expenses
“This deduction doesn’t apply to many people, but individuals with high medical expenses that exceed 7.5% of their adjusted gross income can deduct these expenses,” Melanie Musson, finance expert at Quote.com, wrote in an email. “They can even deduct the miles they drive to medical appointments and the price of airfare for medical reasons.”
According to IRS Publication 502, taxpayers may deduct qualified medical and dental expenses that aren’t reimbursed by insurance, including doctor visits, hospital stays, prescription medications and certain home modifications made for medical care.
2. Child and Dependent Care Credit
The Child and Dependent Care credit is a federal tax credit that helps eligible taxpayers pay for the care of qualifying individuals, including children and dependents. According to Nathan Goldman, Ph.D., CPA, member of the American Accounting Association, this allows parents paying for daycare, preschool or babysitters to work and deduct those costs.
“The restrictions are that the child must be under 13 at the end of the year and living with you for more than half the year,” he explained. You also must have earned income throughout the year, and if you’re married, then both spouses must have earned income.
“The maximum amount that can be deducted is $3,000 ($6,000 if you have two or more qualifying persons),” he added. “This amount does phase out for high-income taxpayers.”
3. Student Loan Interest
“Many people forget that they can deduct their student loan interest,” Musson explained. “Any help you can get when dealing with student loans is something you should take advantage of.”
According to the IRS, the student loan interest deduction is an above-the-line deduction that allows eligible borrowers to deduct up to $2,500 in interest paid on qualified federal and private student loans each year. It applies to loans used to pay for tuition, fees, books, supplies and other necessary educational expenses for yourself, your spouse or your dependents.
4. State Sales Tax Deduction
“Most itemizers deduct state income tax, but if you live in a state without one, or made large purchases, you may benefit more from deducting state sales tax instead,” according to Josh Kaplan, CFP, EA, financial advisor at D.C.-based financial planner Armstrong, Fleming & Moore. “This option is available regardless of your state’s income tax status.”
Instead of deducting state income taxes, you can choose to deduct the amount of state and local sales tax you paid throughout the year when itemizing your deductions. To keep track, one option is to keep receipts and total up the actual sales taxes paid. Another option is to use the IRS Sales Tax Deduction Calculator, which estimates the deduction based on your income, family size, and the state and local sales tax rates where you live.
5. Home Office Deduction
“If you work from home and have a room or portion of your home dedicated to your work, you can deduct a percentage of your home expenses, including mortgage,” Musson said.
According to Goldman, this can be done using the simplified method or the regular method. The simplified method allows you to deduct $5 per square foot of space, up to 300 square feet, while the regular method involves calculating the actual percentage of your home devoted to business use. You can then deduct that percentage of your home expenses, such as rent or mortgage interest, utilities, insurance, repairs and depreciation.
“To qualify, the office must be for exclusive and regular use of the business as well as the principal place of business,” Goldman explained. “Shared spaces between the office and other uses of the home (i.e., a bedroom that has a desk in it) can void the deduction.”
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