Common Tax Deductions That Many Americans Overlook
Tax season can feel like a daunting time of the year, especially with the mountain of paperwork and the pressure to maximise your refund or minimise the amount you owe. If you’re like most Americans, you probably focus on the more common tax deductions, such as student loan interest or mortgage insurance. But did you know that there are several lesser-known deductions that can help reduce your taxable income and potentially increase your tax refund?
It’s true—many taxpayers miss out on deductions simply because they’re unaware of them or they don’t think they apply to their situation. In this article, we’ll explore some of the most commonly overlooked tax deductions, so you can make sure you’re not leaving money on the table when filing your taxes. Whether you’re a seasoned filer or a first-timer, understanding these deductions can make a significant difference in your final tax bill.
1. Medical and Dental Expenses
Understanding the Deduction for Medical Costs
Many taxpayers are surprised to learn that they can deduct certain medical and dental expenses from their taxes, but the catch is that these expenses must exceed a certain percentage of your adjusted gross income (AGI). For most taxpayers, this threshold is 7.5% of your AGI, meaning only the portion of your medical expenses that exceeds this amount can be deducted.
Expenses that qualify for the deduction include:
- Doctor and dentist visits
- Prescription medications
- Health insurance premiums
- Long-term care services
- Travel costs related to medical treatment
For example, if you earn $50,000 a year, you can only deduct medical expenses that exceed $3,750 (7.5% of your AGI). While it may seem like a high bar, large medical bills, especially those related to surgery, dental work, or prescription drugs, can quickly add up and help you exceed the threshold.
Why Many Overlook This Deduction
Many people don’t realise that they can deduct smaller medical expenses, such as insurance premiums or travel costs, unless they keep meticulous records throughout the year. Keeping track of these expenses can help you unlock this valuable deduction.
2. State and Local Taxes (SALT)
Understanding SALT Deductions
The state and local tax deduction (SALT) allows taxpayers to deduct taxes paid to state and local governments. This includes:
- State income or sales taxes
- Property taxes
While many taxpayers are aware of property tax deductions, they often overlook state income or sales taxes, especially if they live in a state that doesn’t have a state income tax. However, you can still deduct state and local sales taxes if you itemise your deductions.
For 2023, the SALT deduction is capped at $10,000 per year, or $5,000 if married filing separately. This cap can affect those who live in high-tax states, but it’s still worth considering if you have significant property taxes or pay substantial sales taxes on big-ticket items.
Why This Deduction is Overlooked
The SALT deduction is often overlooked because of the cap. However, for those who live in states with high property taxes or who have large state income taxes, this deduction can provide a substantial reduction in taxable income.
3. Charitable Contributions
Deducting Donations to Charity
Donating to charitable organisations isn’t just good for the community—it can also benefit your tax return. Many taxpayers are aware that they can deduct donations to qualified charities, but they often forget to include smaller donations, or they don’t keep proper documentation.
Qualifying charitable donations include:
- Cash donations
- Donations of property (clothing, furniture, etc.)
- Volunteer expenses, such as mileage
One often-overlooked opportunity for tax savings is the ability to deduct mileage driven for charitable purposes. If you volunteer for a charity, the IRS allows you to deduct 14 cents per mile for charitable miles driven, along with other related expenses like tolls and parking fees.
Why This Deduction is Overlooked
Donors often forget to track non-cash donations, like clothing or furniture, and fail to get proper receipts. If you make multiple small donations throughout the year, they can add up significantly, so it’s important to keep track of them to maximise your deductions.
4. Student Loan Interest
Deducting Interest Paid on Student Loans
If you’re paying off student loans, you may be eligible to deduct up to $2,500 in interest paid on student loans each year. This deduction is available to those who earn below a certain income threshold, and the deduction applies even if you don’t itemise your deductions, meaning you can take it as part of your standard deduction.
You can deduct the interest on loans taken out for both undergraduate and graduate studies, making this a valuable tax break for those who are still repaying their student loans. The deduction phases out for higher earners, so it’s important to check the income limits to determine whether you qualify.
Why This Deduction is Overlooked
Many people assume that student loan interest is only available if they itemise their deductions, but it’s actually an above-the-line deduction. This means you don’t have to itemise to claim it, making it an easy deduction to miss for many taxpayers.
5. Home Office Deduction
What the Home Office Deduction Covers
For those who work from home, whether as freelancers, remote employees, or small business owners, the home office deduction can be a game-changer. This deduction allows you to claim a portion of your home expenses, such as utilities, rent or mortgage, insurance, and repairs, as business expenses.
To qualify for the home office deduction, the space you use must be your principal place of business or used exclusively for business purposes. The IRS offers two methods for calculating the deduction: the simplified method and the regular method, which requires detailed calculations of square footage and actual expenses.
Why This Deduction is Overlooked
Many people who work from home don’t realise they qualify for this deduction or think it’s too complicated to apply. However, if you use a dedicated space for work, the home office deduction can significantly reduce your tax liability.
6. Educator Expenses
Deducting Expenses for Teachers and Educators
Teachers and educators often spend their own money on classroom supplies, and the IRS allows them to deduct up to $300 for unreimbursed expenses. If both spouses are eligible educators, they can deduct up to $600 if filing jointly. This deduction includes classroom supplies, equipment, and even professional development courses that educators pay for themselves.
Why This Deduction is Overlooked
Educators may not always keep receipts for small classroom purchases, and they may forget to claim this deduction if they don’t keep track of their out-of-pocket expenses. However, these small deductions can add up, so it’s essential to track your spending throughout the year.
7. Moving Expenses for Work (for Certain Individuals)
Understanding Work-Related Moving Expense Deductions
While moving expenses for personal reasons are not deductible, if you’re moving for a new job and meet specific criteria, you may be able to deduct your moving expenses. This applies to active-duty members of the armed forces who move due to a military order.
For the general public, moving expenses were eliminated as a deduction under the Tax Cuts and Jobs Act for most taxpayers. However, some exceptions apply, particularly for military personnel.
Why This Deduction is Overlooked
Since most people no longer qualify for moving expense deductions due to the changes in the tax law, many forget to look into the exceptions that still apply for military personnel.
Conclusion
As you prepare for tax season, it’s important to keep an eye out for overlooked deductions that can reduce your tax liability. From medical and dental expenses to charitable contributions and student loan interest, there are plenty of opportunities to lower your tax bill. By staying organised and keeping thorough records, you can make sure you’re not missing out on valuable tax deductions.
FAQs
1. Can I deduct medical expenses if I don’t have health insurance?
Yes, you can deduct out-of-pocket medical expenses, even if you don’t have health insurance, as long as they exceed 7.5% of your AGI.
2. How do I know if my charitable donation is tax-deductible?
Your donation must be made to a qualified charitable organisation, which you can check using the IRS’s online tool, IRS Select Check.
3. Can I claim the home office deduction if I work from home part-time?
Yes, as long as the space is used exclusively for work purposes, you can claim the home office deduction, even if it’s part-time.
4. Do I have to itemise my deductions to claim student loan interest?
No, student loan interest is an above-the-line deduction, meaning you don’t need to itemise to claim it.
5. What is the maximum deduction I can claim for moving expenses?
For most people, moving expenses are no longer deductible. However, military personnel who move due to a military order may still claim the deduction.
6. Can I deduct supplies I buy for my home office?
Yes, supplies purchased for your home office can be deducted as part of your home office expenses, along with rent, utilities, and other related costs.
7. Are there any other deductions I should be aware of?
Yes, there are many other deductions, such as for student educators, work-related expenses, and state taxes. Be sure to consult with a tax professional to explore all available deductions.
