Becoming familiar with deductions and tax credits could potentially reduce thousands of dollars from your tax bill and keep more money in your pocket.
Many Americans, however, make gaps. Taxpayers who claimed the standard deduction on their tax returns received more than $ 747 billion in tax deductions, according to recent IRS data, but many of them missed the tax deductions they deserved.
For example, one in five people who qualify for the earned income tax credit do not claim it on their tax returns, according to the IRS, which is one of the most refundable tax credits for families. low or moderate income. According to experts, one possible reason why many people do not take advantage of the credits is that they think they are not eligible.
“There are a lot of credits and deductions that Americans are missing,” says Lisa Greene-Lewis, certified public accountant at TurboTax.
Here are nine deductions and credits that experts say are generally overlooked:
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Earned Income Tax Credit
The EITC is a refundable tax credit – not a deduction. This credit is designed to supplement the wages of workers with low to moderate incomes. However, it does not apply only to low-income taxpayers.
If you lost a job, suffered a drop in wages, or worked fewer hours during the year, experts say.
“Many people think they are earning below the income threshold to raise their taxes, so they don’t file their taxes and don’t take advantage of the earned income tax credit,” says Greene-Lewis. “Others may have changed their income, so they may have crossed the line before, but have been laid off or unemployed for other reasons and do not realize that they are now eligible because their income has changed. “
The exact reimbursement you receive depends on your income, marital status and the size of your family. To obtain a refund from the EITC, you must file a tax return, even if you do not owe any tax. If you have been eligible to claim the credit in the past, but have not done so, you can apply at any time of the year to request an EITC refund for up to three previous taxation years.
Tax credit for the care of children and dependents
A tax credit is generally better than a tax deduction because it reduces your tax bill dollar for dollar, say tax specialists. It is a frequent oversight to miss the credit for children and dependents if you pay your childcare bills via a work reimbursement account. According to the TurboTax, the law allows you to execute up to $ 5,000 of such expenses via a tax-advantaged work reimbursement account.
Up to $ 6,000 in care costs may be eligible for the credit, but the $ 5,000 from a tax-advantaged account cannot be used, says Greene-Lewis. So if you are spending up to $ 5,000 on a work plan, but you are spending more on work-related child care, you can claim the credit for up to $ 1,000 more. This would reduce your tax bill by at least $ 200 using the minimum of 20% of the expenses. The percentage of credit increases for low-income households.
Interest on student loans
According to Credible, an online market where borrowers can buy student loan products, mortgages and credit cards, less than a third of student borrowers claim interest deduction on student loans.
Student loans can be deducted as an income adjustment, up to $ 2,500, according to Christina Taylor, chief operating officer at Credit Karma Tax. The deduction is applied on Form 1040 and does not require a detailed deduction to claim.
If your child is in college or if you are a student, here are three credits you can possibly apply for:
1. The American tax credit for opportunities: A credit for eligible study fees paid by an eligible student for the first four years of higher education. You can get a maximum annual credit of $ 2,500 per eligible student.
2. The Lifelong Learning Credit: This credit is for eligible tuition and related expenses paid by students enrolled in an eligible educational institution. This credit can pay for undergraduate, graduate and vocational courses. There is no limit on the number of years you can claim the credit, and it is worth up to $ 2,000 per return.
3. The deduction for tuition and fees: This deduction can be claimed instead of a study credit and may be more advantageous than the Lifelong Learning Credit for those who cannot claim the US Opportunities Tax Credit. It allows eligible taxpayers to deduct up to $ 4,000 from taxable income. It cannot be claimed in the same year as AOTC or LLC.
Dividends reinvested
It is not a tax deduction, but rather a subtraction that can reduce your tax obligations. If you have mutual fund dividends automatically invested in additional stocks, each reinvestment increases your “tax base” cost in the stock or mutual fund, according to Tim Speiss, co-director of Personal Wealth Advisors Group. EisnerAmper. This increase in the tax base reduces the amount of taxable capital gain or increases the loss of tax savings when you sell your shares.
Forgetting to include reinvested dividends in your cost base would result in overpaying your taxes, warns Speiss.
State sales tax
Taxpayers living in states with no income tax can ignore the deduction for state sales taxes. The states that do not tax income are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
According to TurboTax, there are two ways to claim the sales tax deduction on your tax return for those who are free from income tax.
First, you can use the IRS tables provided for your state to determine what you can deduct. For example, if you bought a vehicle, boat, plane, house, or did major renovations, you may be able to add the state sales tax you paid on these items to the amount shown in the IRS tables up to the limit of your state, says TurboTax. Or you can track and use all the sales taxes you paid throughout the year.
The total of your itemized deductions for all your local and state taxes is limited to $ 10,000 per year.
Mortgage points
Did you refinance your mortgage last year? If you are a home owner, you may be faced with mortgage point charges. When refinancing a mortgage, you need to deduct the points over the life of the loan.
This means you can deduct 1/30 of the points per year if it’s a 30-year mortgage, or $ 33 per year for every $ 1,000 of points you paid, according to TurboTax. In the year you repay the loan – because you are selling the house or refinancing again – you can deduct any points not yet deducted, unless you refinance with the same lender.
One mortgage point equals 1% of the amount of your loan. If you have a $ 100,000 home loan, one point equals $ 1,000.
Charitable donations
It is common to overlook small charitable contributions. These include gifts to qualified nonprofits or the cost of items you may have contributed to a local fundraising activity.
According to TurboTax, in cases where you drove your car for charitable purposes in 2019, you could deduct 14 cents per mile when you drive for charitable activity. Be sure to keep accurate records and for all other tax deductible items.
Moving expenses
As of 2018, moving expenses are no longer eligible for a tax deduction on your federal income tax return, unless you are in the military. However, some states like California continue to provide a deduction on your state tax return if you qualify.
Job search expenses incurred while looking for your first job are not deductible, but moving expenses related to a first job are deductible. This deduction is available even if you do not specify. For example, if you moved more than 50 miles, you can deduct 23 cents per mile from the cost of transporting yourself and your household goods to the new area, plus parking fees and tolls to drive your own vehicle. , according to TurboTax.
Jury fees
Were you a member of the jury last year? If so, you may have received compensation from the court for your time. You may have incurred expenses to fulfill your civic duty, which the court may have reimbursed you.
The IRS treats fees collected as taxable income. Therefore, if you remit the jury fees to your employer, you have the right to deduct the jury fees which are sent to you, so that you are not taxed on the receipt of the jury fees.
