If you want to increase your tax refund, keeping up with your tax deductions is one of the easiest places to start. Chances are, you probably have some idea of what you’ll be writing off when tax season rolls around. Just take the standard deduction, right?
But not so fast! You might be missing something.
The reality is, certain tax deductions are more commonly overlooked than others. In 2020, several new tax benefits were added, and there are plenty more worth taking advantage of. In fact, you might qualify for more deductions than you realize, and those minor expenses could majorly add up.
Before you start adding up or subtracting any expenses, here’s what to know about tax deductions and especially the ones most commonly overlooked.
What Is a Tax Deduction?
As with exemptions or credits, tax deductions are one form of tax incentives. Also called “tax write-offs,” they reduce your taxable income, in turn reducing your tax liability.
When you subtract the tax deduction amount from your income, your taxable income will become lower. Ultimately, a lower taxable income will result in a lower overall tax bill.
Keep in mind, the IRS places certain limitations on what you can deduct annually to reduce your tax burden. No matter what, there will always be a threshold amount for most deductions, and you should familiarize yourself with those limits before filing.
But before you do that, you will need to know the two main types of deductions and then decide which one you’ll likely get more out of.
Standard Deductions Vs. Itemized Deductions
Typically, there are two primary ways to claim tax deductions. They’re called standard deductions or itemized deductions. The difference between them comes down to basic math.
Standard deductions lower your income via a fixed amount based on your adjusted gross income (AGI), and what you qualify for will depend on your filing status. Itemized deductions are individual, eligible expenses. Most people decide which to claim based on which one lowers their tax bill the most in the end.
Again, you might already have a good idea of what deductions you’ll be making. But be sure not to leave anything out. Every year, too many people let countless qualifying expenses become needlessly lost money that was rightfully owed to them.
Here are some of the most overlooked deductions.
State Sales Tax
This write-off makes the most sense for those living in states that don’t impose income taxes. These lucky states include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Here’s how it makes a difference.
When it comes to deductibles, everyone must choose between state and local income taxes or state and local sales taxes. Those residing in income-taxing states tend to go with the state and local income tax deduction, as it’s usually the more beneficial of the two.
On the other hand, if you’re living in an income-tax-free state, you have two options for claiming the sales tax deduction on your tax return. Firstly, you’ll be able to use the IRS tables for your state to help determine what’s deductible. Also, consider your purchases. Have you purchased a vehicle, boat, airplane, home, or made home renovations? If so, you could potentially add the state sales tax paid on items up to the limit for your state, as determined by the IRS tables.
Lastly, if you keep up with all of your paid sales tax throughout the year, you may be able to use it.
To figure out what you can deduct, use the IRS’s Sales Tax Calculator.
Student Loan Interest
In recent years, some of the deduction rules have changed, including this exception. Those paying for the first four years of college out of pocket are now eligible for a bigger tax break.
Whether you or someone else pays on your student loan, you’ll be able to receive this deduction. The IRS now views repayment from another party as though the person gave you the money so that you could pay down the debt.
Per Turbo Tax, “a student who’s not claimed as a dependent can qualify to deduct up to $2,500 of student loan interest paid by you or by someone else.”
During tax season, many people only factor in the sizable donations made throughout the year. However, the little things should be added up as well.
Keep up with your out-of-pocket costs incurred with charitable contributions both big and small. For instance, let’s say you prepared something for a soup kitchen. If that soup kitchen is a qualified nonprofit organization, those ingredients count as a deduction.
On top of the money spent, your time spent counts too. If you’ve “donated” your free time, make a note of it. Volunteering hours and the gas you spend while helping out are expenses that could easily qualify as charitable deductions.
With that said, charitable travel deductions are very firmly defined. The main purpose of your trip must be charity-related–and only for charity. If there’s any substantial element deeming it a vacation, it doesn’t count. The IRS says that to qualify, you must be “on duty in a genuine and substantial sense throughout the trip.”
Refinancing Your Mortgage
When you refinance a mortgage, you are able to deduct the points over the loan’s lifespan. So if you have a 30-year mortgage, you’d deduct 1/30th of the points annually. While you won’t back very much from this, you will consistently get back something. And there’s no sense in throwing your money away.
Also noteworthy is that when you finally pay off the loan, you’ll be able to deduct all points not yet deducted. This will add up to more than you realize.
According to the IRS, everyone is entitled to a deduction specifically for medical expenses. However, only expenses exceeding 7.5% of your AGI qualify. Also, if you’re reimbursed by your insurance company for any medical bill, that amount won’t be deductible.
As noted by Investopedia, a portion of money you pay for long-term care (LTC) insurance can minimize your tax bill as well because long-term care insurance is a deductible medical expense. If you qualify, the IRS permits deducting an increasing portion of your premium over time. One of the biggest criteria to meet is that the insurance cannot be subsidized by your employer.
Also, if you don’t have a health savings account, you might want to set one up. All contributions that go into HSA’s are tax-deductible. If you have a high-deductible health plan (HDHP), you can contribute up to $3,600 as of 2021.
There’s another medical deduction worth noting, and it’s one that’s frequently overlooked.
When you pay the doctor a visit, you can deduct the cost of traveling to medical care. For instance, you can write off how much it cost to take the bus to your doctor’s office, gas costs, tolls, parking, and lodging, as long as it remains within the allotted limits.
Last but certainly not least, additional co-payments, prescription drug costs, and lab fees are all deductible medical expenses. If these fees are not fully covered by your insurance plan, the IRS says they can be deducted. And that’s not all! Therapy, nurse services, and even acupuncture all fall under the IRS’s definition of qualifying medical expenses.
Jury Duty Fees
In some cases, employers will pay their employees the full amount of their salary while they are off serving jury duty. However, the employer may then require their employees to hand over those jury fees to the company.
The IRS dictates that reporting those fees as taxable income is mandatory. However, by giving the money to your employer, you will have the right and ability to deduct the fees to avoid taxation on that money.
Home Office Expenses
With so many people working from home since 2020, this one might be incredibly useful. If you use a part of your home “regularly and exclusively” for business, you may qualify for a deduction. And you don’t have to have an entire office to qualify.
As long as your home office is an area used solely for work, it counts. Those who meet the criteria will be allowed to deduct a portion of their rent, mortgage interest, utilities, and homeowners or renters insurance, based on how much of their home is utilized as a home office.
However, this isn’t just for those who are fully self-employed. If you did any freelance work, consulting, or were somehow self-employed during the year, you may qualify for a partial home office deduction. Even if you wound up only being self-employed for one month, you could very well qualify for a home office deduction for that time period.
As of 2021, the following still qualify as miscellaneous deductions:
- Gambling losses adding up to the amount of your collective winnings
- Interest on borrowed money used to purchase an investment
- Theft losses on income-producing property
- Federal estate tax related to income from various inherited items, including IRAs
- Impairment-related employment expenses for those with disabilities
To find out which tax deductions and credits you qualify for, check out the IRS’s criteria.