What do you know about tax deductions? In GOBankingRates’ 2023 taxes survey polling 1,002 Americans, 30% of overall respondents said the number of deductions, or tax allowances they could claim, was the aspect they least understood about their taxes.
Percentage-wise, understanding the amount of tax deductions remained consistent among almost all age groups. This is especially true of those ages 25 to 34 (34%), 35 to 44 (35%) and 65 and over (33%).
Rather than remain in the dark about expenses you can deduct, let’s help simplify the tax process. Here are the biggest tax deductions Americans aren’t expecting this year.
Taxpayers may claim medical expenses among their itemized deductions, but only the amount over 7.5% of their adjusted gross income (AGI).
What medical expenses are taxpayers missing most? Portia Rose, managing director at Mazars, said some of the medical expenses she sees people miss include long-term care insurance costs and transportation costs to and from the doctor.
Mortgage Interest and Real Estate Taxes
“We see some people miss the real estate taxes they pay on their second home, inherited property or that piece of land they own in the Midwest,” Rose said. “Even though the deduction is limited on the federal level, some states allow the full deduction – New York State included.”
This includes cash and non-cash contributions. Taxpayers who clean out their closets and donate items to the local Salvation Army are recommended by Rose to get a donation receipt afterward.
“Non-cash contributions are deductible as charitable contributions,” Rose said. “If the value is more than $5,000, an appraisal is needed.”
College Savings Plan Contributions
While this is not a federal deduction, Rose said some states allow the contribution as a reduction for taxable income.
Interest on College Education Costs
If a parent pays off a child’s student loan and the child is not claimed as a dependent on the parent’s return, the child can deduct up to $2,500 of student loan interest paid by the parent each year, said Lei Han — Ph.D., CPA and associate professor, department of accounting at Niagara University. There isn’t a need to itemize to claim this deduction.
Self-Employment Tax Deduction
“If you are self-employed and pay Social Security and Medicare taxes yourself, you can write off half of what you pay,” Han said.
Rose said taxpayers may be able to deduct contributions to a traditional IRA. However, the amount of the deduction depends on your income and if you are covered by a retirement plan at work. Planning for this deduction, Rose said, should take into consideration long-term goals and whether a non-deductible Roth contribution would fit into your long-term goals.
Child Care Credit
“If both spouses work or are looking for work, a credit can be claimed for the expenses paid for child care, so you could work,” Rose said. “This includes child care, after school care and summer camp (but not sleepaway camp).”
Educator Expense Deduction
Eligible educators or schoolteachers may be able to deduct up to $300 spent on classroom supplies in 2022.
Those who started a small business or turned a hobby into a profitable enterprise may deduct many types of expenses relating to the business. Grant Freeman, chief customer officer at Thryv, recommends these most frequently overlooked small-business tax deductions:
Business meals are deductible, now at a 50% deduction to small-business owners. Freeman said to partake in these savings, the meal must be with a customer or employee and have a reasonable price point.
Holiday Party Expenses
Can you deduct holiday party expenses? The answer for small businesses is yes.
Freeman said holiday parties in 2022 are 100% deductible. “You can also deduct up to $25 of each gift you give customers annually. Overall, gifts under $100 are considered de minimis by the IRS and aren’t taxed.”
Retirement Plan Deductions
Small businesses that offer employees retirement plans may be able to lower their taxes with these deductions. A few types of retirement plans available to small businesses include Simplified Employee Pension (SEP) plans, SIMPLE IRA, one-participant 401(k) and defined benefit plans.
“Business owners can defer up 25% of an employee’s compensation to retirement savings through an SEP,” Freeman said.
Equipment and Property Depreciation
If you own property or equipment used for your small business, you may be eligible for a larger depreciation deduction due to the Tax Cuts and Job Act (TCJA).
Freeman said the TCJA included a provision that allows business owners to take 100% bonus depreciation. This means they can deduct the full price of the asset in the first year.
Kids on the Payroll
If your children are under 18 years old and work for your business, Freeman said owners can deduct their salaries from the business income as a business expense.
Am I Missing Any Other Deductions?
Do you worry you might be missing out on other big tax deductions?
Rose recommends taxpayers meet with a tax professional before the end of the tax year, or the April 18, 2023, tax deadline, to make sure they have the documentation necessary to claim the deductions to which they are entitled.
More From GOBankingRates
- 7 Best Mystery Shopping Companies To Work For
- I'm a Self-Made Millionaire: Here Are 3 Things I Never Waste Money On
- 3 Ways to Recession Proof Your Retirement
- 7 Mistakes That Drain Your Wallet at the Gas Station