The dreaded tax season is upon us, but knowing which deductions to take is only half the battle to lower the amount Uncle Sam expects by April 15. The earlier you file your taxes, the sooner you can expect a refund or beat the hackers.
Here are the top ten deductions consumers should check to see if they qualify for since many of these can add up to thousands of dollars.
Moving for a job has its perks, because you are allowed to deduct the price of the movers, supplies, storage for up to 30 days, moving insurance and gas money, said Lior Rachmany, CEO of Dumbo Moving + Storage, a New York City moving company. There are guidelines depending on the length of your employment and distance of your relocation.
“Don’t lose your moving expense receipts amidst a move,” he said. “If you hold onto your moving bill, receipts from any moving expenses, storage needed, confirmation on the price of moving insurance and even the gas money taken to move, you can save money on taxes.”
Conducting some spring cleaning can reap its rewards since the IRS allows consumers to take a deduction for charitable endeavors worth up to 50% of their annual adjusted gross income, said Ryan Saltz, a licensed tax professional for Tax Defense Network, a Jacksonville, Fla.-based tax resolution company. All donations should have been made by Dec. 31, 2015 to an IRS approved non-profit organization.
“Don’t underestimate donations made from your household property and goods and refer to IRS publication 561 for more information on determining the value of donated property,” he said.
Tuition and Fees
A taxpayer can deduct up to $4,000 in higher education tuition and fees paid during 2015 for themselves, their spouse or any dependents. The deductions include money spent on activity fees and expenses related to course materials such as books, supplies and equipment.
The American Opportunity Credit allows people to claim a credit of up to $2,500 for adjusted qualified education expenses paid for each student who qualifies, said Mark Steber, chief tax officer at Jackson Hewitt, a Parsippany, N.J.-based tax prep company. The Lifetime Learning Credit allows a learning credit of up to $2,000 for qualified education expenses paid for all eligible students. There is no limit on the number of years the lifetime learning credit can be claimed for each student, he said.
Tax deductions are simply a dollar for dollar reduction of your taxable income, said Steber. A tax deduction of $100 lowers your taxable income by $100 while a tax credit is a dollar for dollar tax benefit or increase in your tax refund. In other words, a $100 tax credit is worth $100 dollars.
"Think of it this way: if you have a tax deduction worth $100 and your tax rate is 25%, that benefit is worth about $25," he said. "If you have a tax credit of $100 and a tax rate of 25%, your tax credit is still worth $100. So tax deductions are great, but tax credits are even better.”
Student Loan Interest
Even if you do not itemize your deductions, your student loan payments qualify, said Andrew Townsend, a tax analyst at TaxAct, a Cedar Rapids, Iowa tax preparation company. The maximum amount is $2,500 or the amount of interest actually paid. The amount of the deduction gradually decreases and phases out if the taxpayer’s modified gross income is over $80,000 or $160,000 for married couples filing jointly.
Any interest homeowners are paying for a home loan, a second mortgage or a line of credit all qualify as a deduction, said Townsend.
Many people forget that the amount of interest that you paid on a home equity loan is also tax deductible, said Scott Mazuzan, a CFP at F.L.Putnam Investment Management Company in Wellesley, Mass., a $1.4 billion registered investment advisor.
“We have seen some clients use home equity loans as sources of liquidity in bear markets or to cover unexpected expenses,” he said. “The deductibility of interest makes this option very attractive."
As more people partake in online gambling, many individuals are faced with reporting their winnings on their tax return. But their losses from gambling are tax deductible, said Mazuzan.
“While it may be painful to acknowledge some bad hands, deducting gambling losses can be very effective in reducing an individual’s overall tax burden,” he said.
Individuals who itemize deductions can opt to deduct either state and local income taxes or state and local sales taxes paid, said Laurie Samay, a CFP and portfolio manager with Palisades Hudson Financial Group in Scarsdale, N.Y.
“Taxpayers should choose whichever results in the largest deduction, though residents of states that do not impose an income tax, such as Texas or Florida, will be limited to the state and local sales tax deduction,” she said. “When figuring the state and local income tax deduction, it’s important for taxpayers to note that any state and local estimated taxes, as well as any prior year’s state and local taxes, are includible if paid in the tax year in question.”
Consumers who were faced with an emergency room visit or long stay in the hospital could have faced thousands of dollars in out of pocket expenses. Depending on your age, the amount that exceeds an individual’s adjusted gross income is deductible, said Mazuzan.
“This threshold deters many individuals from attempting itemization, but remember that there are many expenses which qualify for this deduction, including prescriptions, co-pays, insurance premiums and even travel expenses,” he said. “This can be especially appealing for individuals who travel long distances for medical treatment on a regular basis.”
Self-employed workers are eligible to deduct premiums paid for medical, dental and qualified long-term care insurance for themselves, their spouse and dependents.
“You must either be a self-employed individual with a net profit, a partner with net earnings from self-employment or a more than 2% shareholder in an S-corporation who receives wages,” said Samay.
Personal Use Casualty, Disaster and Theft Loss
Losing personal belongings from a robbery or from extreme weather is frustrating, but homeowners can deduct casualty and theft losses relating to your home, household items and vehicles that your insurance company did not cover or items that are covered by insurance if you file a timely claim for reimbursement and reduce the loss or losses reported by the amount of any actual or expected reimbursement, said Samay.
“To figure the allowable deduction, you must first calculate the loss incurred from each casualty or theft event that occurred, net of any salvage value, insurance or other reimbursement and an additional $100 reduction per event," she said. "You will be allowed to deduct the aggregate net losses that exceed 10% of your adjusted gross income."
If an area is declared a Federal Disaster Area (FDA), homeowners can claim special tax considerations and benefits, said Steber.
"You need to check the IRS website to see if your county has been declared a FDA, so you can apply for disaster relief, identify the right deductions and ensure you are keeping the important documentation," he said.
Tax Preparation Fee
Consumers who itemize their deductions can deduct their tax preparation fees, said Samay. These fees include the cost of professional tax preparer services, tax preparation software and electronic filing fees. Tax preparation fees are subject to the 2% floor, said Samay.
“This means that you will only receive a deduction for these expenses if they, along with any other miscellaneous deductions you may have exceed 2% of your adjusted gross income,” she said.