Paying taxes can be stressful. Even with the plethora of free tax tools at your disposal, the idea of going through your entire financial history for the year can prove daunting.
While you’re recollecting all of this information, you will also need to determine if there are any tax deductions you might be eligible for.
In this article, we will go over the top 6 most overlooked tax deductions, allowing you to make certain that you’re not overpaying your taxes.
It can also help to reduce your tax liabilities or on the other hand, claim the tax savings you deserved. (If you’re a business owner you might be interested in reading about corporate tax deductions).
Here’s a quick look at the top 6 most overlooked tax deductions:
1. Charitable Donations
Whenever you donate to charities, you should bear in mind that you may deduct the cost of goods, stocks, bonds, or even the gift of cash you gave throughout the year. Many taxpayers overlook the out-of-pocket deductible amount such as the gas they spent per mile.
Remember, when you drive your car for charitable deeds, you may reduce it to 14 cents per mile. The same goes when you buy ingredients for soup kitchens, stamps that fundraisers will use, and toll, and parking fees. Learn more about the itemized tax deduction.
Just be sure that your charity is IR-qualified then keep a log of all your expenses to support the deductions you made or when you need to claim your tax refund.
2. Student Loan Interest
The IRS released a new policy that anyone could pay for a student loan and you can deduct up to $2,500 from your tax, regardless of the total amount of interest you or they paid. Before, the law implemented that whoever made the loan should also be the one responsible to repay for it and be qualified to make deductions as long as you’re not claimed as dependent on a tax return.
Take into consideration that the IRS limits this deduction in consideration to your modified adjusted gross income (MAGI). Your student loan must be qualified, also, meaning it should be a private or public student loan aimed to subside any of the following qualified expenses:
- Tuition and fees
- Room and board
- Books and other class supplies
- Other necessary expenses, like transportation.
3. Child and Dependent Care Tax Credit
You can receive the child and dependent tax credit if you are someone who pays for someone to take care of your child or any dependent who can’t take care of themselves. The government will give you credit for the money you spend on care dollar for dollar. This tax credit is better than a tax deduction that simply reduces some amount on your tax.
For example, a $1,000 deduction can reduce your tax to $150 or $200 while a tax credit directly reduces your tax bill for the exact amount you spend providing it is not more than $3,000 if it is for one person and $6,000 for two or more dependents. See the list of requirements to check if you are eligible for the tax credit.
4. Earned Income Tax Credit (EITC)
The IRS claimed that 25% of taxpayers overlook the Earned Income Tax Credit (EITC), missing out on thousands of dollars in a taxable year. Complex rules lead to failure to believe that they are eligible for the tax credit. This tax credit can be meaningful savings, particularly for lower-to-moderate income people.
It ranges from $538 up to $6,660 for 2020. The good thing about this tax credit is that all qualified taxpayers may claim a credit refund from the IRS regardless if they owe tax or not. You just need to file a tax return to claim your refund. Note that the exact amount will depend on your marital status and family size.
A common misconception of middle-class taxpayers is they are not eligible for the claim. But there are some circumstances that make them qualified and these includes:
- Unemployment during the taxable year
- Took a pay cut
- Worked a few hours during the year
Check your eligibility and in case you failed to claim your refund, you can file a tax return anytime this year and receive the amount up to three previous taxable years. You may also seek help from any tax relief company to claim the refund that you deserve and to solve other tax liabilities that affect you and your family.
5. State Sales Taxes
The Internal Revenue Service (IRS) allows this write-off for those who live in a state that does not impose income taxes. People who live in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming can benefit most from this tax deduction since they can choose which among the state income tax or the state sales tax should be deducted. Note that you cannot deduct both of them.
Most of the time the amount you pay for state income tax is greater than the amount of state sales tax. So, income tax-free states can take advantage of it by deducting their sales tax.
Make sure you gather all your purchase receipts during the year so you may proceed in calculating your sales tax claim. If you will use the State Sales Tax table provided by the IRS to calculate your sales tax, make sure to find your state and the amount that you can deduct based on your income. But you may also use the IRS sales tax calculator to see what you can deduct.
6. Last Year’s State Income Taxes
If you owe sales taxes when you filed your 2022 tax return in 2023, you may include the amount in your itemized deduction when you file your tax return for 2023.
You may deduct it from your state income taxes withheld from your salary or you may choose to deduct it from the state general sales tax, provided that you have kept all your purchase receipts. This will be beneficial to you especially if you purchase big-ticket items such as a boat, vehicle, airplane, or any materials you used for house renovation.
Summary
Rules can be complex at times and it might be challenging for you to track all of the mentioned deductions and credits that you might deserve. But take note that it can add up to your savings and reduce your tax liabilities.
Don’t miss out to seek help from the tax relief company to keep track of all your tax preparation and have a deeper understanding of all the tax deductions and credits you are qualified for.