How to claim the tax deductions you deserve
The IRS reports that taxpayers who took the standard deduction on their tax returns received more than $747 billion in tax deductions, but many of them missed out on tax deductions they deserved. As a result, they likely paid more taxes than they should have. Meanwhile, more than 45 million Americans itemized their deductions, taking more than $1 trillion dollars in tax deductions.
Whether you itemize your deductions or take the standard deduction, check out these 5 most-overlooked tax deductions to ensure you’re getting all the tax savings you are entitled to.
1. In-kind charitable donations
It’s easy to track the donations you make to charities via payroll contributions and checks you write, but don’t overlook the goods and services you donate throughout the year. For example, if you donate food to qualified fundraisers or soup kitchens, you can deduct the value of the ingredients you used as an in-kind charitable contribution. The same goes for the costs of other “hard” goods you give—stamps to be used in a fundraiser, clothing you drop off at a qualified thrift store, even the gasoline you use when using your car or truck for charitable purposes (calculated at 14 cents per mile).
2. Interest on student loans—regardless of who paid it
Under a new IRS policy, the qualified student loan interest is tax-deductible no matter who pays it. In the past, the law said that you had to be the one on the loan who is obligated to make the payments and actually pay it yourself to qualify for the deduction. But now, if your parents (or anyone else) help pay off your student loan, you can deduct up to $2,500 of the interest they paid during the tax year on your own tax return – provided you’re not claimed as a dependent on a tax return and meet other requirements. As far as the IRS is concerned, any interest paid on a student loan was paid by the person obligated to repay the loan.
3. Child and dependent care beyond your flexible spending account limit
Many parents set aside money for child and dependent care in a flexible spending account offered by their employers. Flex accounts shelter the money from both FICA and income tax withholding. However, the limit for a flex spending account is $5,000. If you pay more than that for child and dependent care during the tax year, the next $1,000 may be eligible for the Child and Dependent Care Tax Credit, which has a $6,000 spending limit. Tax credits are even better than tax deductions because they reduce your tax bill on a dollar-for-dollar basis.
The IRS provides a minimum tax credit of 20% of your qualifying child and dependent care expenses. That means the tax credit on the additional $1,000 would result in a savings of at least $200 on your tax bill ($1,000 x .20 = $200).
However, the Child and Dependent Care Tax Credit varies by income, increasing to as much as 35% for low-income families. As a result, the tax savings on the additional $1,000 in child and dependent care expenses could be as high as $350 ($1,000 x .35 = $350).
4. Earned Income Tax Credit (EITC)
The IRS estimates that 25% of taxpayers who are qualified to receive the Earned Income Tax Credit (EITC) don’t file for it. Many people are deterred by the rules, which can appear complicated. Even more, people mistakenly believe they don’t qualify for the credit.
The EITC is a tax credit that ranges in value from $529 to $6,557 for 2019. What many people find surprising is that they can receive the credit even if they do not owe tax. In other words, qualifying taxpayers can actually receive a refund from the IRS for the amount of the credit that surpasses what they owe. If they owe zero, they can receive the entire tax credit as a payment from the government.
The payout of the Earned Income Tax Credit is by design. It is intended to supplement the wages of qualifying taxpayers. Many people assume that the EITC is only for low-income wage earners, but this is not the case. Millions of individuals and families who earn moderate incomes can also qualify. Taxpayers who consider themselves “middle class” don’t realize that certain circumstances can make them eligible for the EITC. These circumstances can include:
- Being unemployed for some of the tax year
- Receiving a cut in pay
- Working fewer total hours than in previous years
- The amount of your credit will depend on several factors, including:
- Taxable income
- Marital status
- The number of your qualifying dependents
To receive the Earned Income Tax Credit, you are required to file a federal tax return, even when you don’t owe any federal income tax. If you missed out on filing for the EITC in a prior year, you can even file for up to three previous tax years by either doing your back taxes (if you didn’t file a tax return), or by amending your prior year returns.
5. State and local taxes for those who itemize their deductions
If you own a home, one of the local taxes you can deduct are your property taxes. You can even pre-pay property taxes if you’ve already been assessed for them, i.e. you’ve received a property tax bill, with some of it owed in the first few months of the following year. Keep in mind, with the new tax law, the maximum deduction for all state and local income taxes (aka SALT) is now capped at $10,000. This means pre-paying property taxes may not make sense if you’ll hit this cap, especially in states with high-income taxes.
If you owed and paid state income taxes in 2018, be sure to deduct that amount on your 2019 federal tax return. You can also include state income tax withheld from your paychecks or that you paid in quarterly estimated state tax payments. Don’t forget, this must be added to any other state and local taxes (SALT) you may want to deduct, as the cap for all SALT is $10,000.
State sales tax is also tax-deductible and usually provides the most value in states that don’t have an income tax. That’s because you must choose between deducting state income tax or state sales tax—you cannot deduct both. If you pay state income tax, that amount is often greater than all of the sales tax you paid. In income tax-free states, however, deducting your sales tax makes sense. These states include:
- New Hampshire
- South Dakota
There are two ways to calculate the sales tax you can claim. One way is to keep track of all the sales tax you paid during the year and deduct that. An easier way is to use state sales tax tables provided by the IRS. These tables provide deductible amounts based on the state you live in and your annual income. However, if you made a large purchase, such as a car or truck, a boat, a plane, or a home, or if you made major home improvements, the amount you paid in qualifying sales tax can be added to the amounts in the table to increase your tax deduction.
The best way to see what you can deduct is to use the IRS’s Sales Tax Calculator for this.