Even the IRS encourages taxpayers to use all legal means to lower their tax bills. Why leave free money on the table if you don’t have to? Before you file your taxes every year, whether you work for yourself or for someone else, it’s important to know every single credit that you can qualify for.
To help you out a bit, we’ve rounded up the most common tax credits overlooked by hard workers such as yourself. Take a look to see if you miss out on any of these credits each year. And if so, You can always command your previous year’s returns.
State sales taxes
The write-off is only for residents of states that don’t impose income taxes. Florida, Alaska, and the state of Wyoming–these states. It’s up to you to choose whether you want to deduct state and/or local income taxes, or state and/or local sales taxes. For most of us, the local and state tax deduction is usually the better deal.
There are two options for those who live in “no income tax states” to claim the sales tax deduction from your tax return. To determine the amount you can deduct, check out the IRS site.
You may also be allowed to deduct the state sales tax that you have paid on items such as a vehicle, boat or airplane purchase, or major home renovations. You can also keep track of all sales tax paid throughout the year, and use this information.
You can use the IRS’s sales tax calculator to determine how much you can deduct. Remember that your total itemized deductions for all your state and local taxes are limited to $10k per annum.
Although this is not a tax deduction it can result in significant savings. Remember that mutual fund dividends are automatically invested in additional shares if you’re like most investors. Each reinvestment will increase your “tax basis” in mutual funds or stocks. This reduces your taxable capital gain or increases the tax-saving loss when you sell shares.
Overpaying taxes can be caused by not including the reinvested dividends into your cost basis. This is the amount you subtract from the proceeds to determine your gain. Many tax preparation tools (like TurboTax) include a tool called Cost Basis Lookup. This will calculate your basis and ensure you receive credit for any reinvested dividends.
Donations to charities that are not covered by your budget
It can be difficult to forget the large charitable donations you made in the year via check or payroll deduction. The little things can add up and you can deduct out-of-pocket expenses you incur while doing good works.
For example, ingredients for soups you prepare regularly for a qualified non-profit organization or stamps that you purchase for school fundraisers count as charitable contributions. Remember to deduct 14 cents per mile if you drive your car for charity.
You or another person can pay the interest on student loans
In the past, tax breaks were not available to students whose parents paid off student loans. The law required that both you and the student be liable for the debt in order to qualify for a deduction. There is an exception.
Although you may be aware that you may be eligible for a deduction, even if someone else repays the loan, the IRS treats the amount as if they gave the money to you, and you pay the debt. A student who is not claimed as a dependent may be able to deduct $2,500 in student loan interest that was paid by you or another person.
While many taxpayers have lost the ability to deduct moving costs starting in 2018, there is one group that can still claim moving expenses to the IRS. And it’s Military personnel. Relocating active military personnel can still deduct these expenses, even if they do not receive reimbursement from the government.
They don’t need to pay tax on qualified reimbursements for moving expenses as long as your move is permanent and was not ordered by the military. Get those receipts out right away–you can claim travel and lodging expenses, shipping costs for pets and cars, and household goods.
American Opportunity Credit
This is not a deduction, but a tax credit. This option can save families with college students significant money. The American Opportunity Credit taxes 100% of the $2k first spent on qualified college expenses. The next $2k in expenses will be covered at 25%. You may be eligible to receive a maximum of $2,500 per year in credit as a student. Your adjusted gross income will determine the amount of your actual credit.
Qualified and unreimbursed medical expenses can be deducted if they exceed 7.5% half percent of their annual AGI. These expenses can be caused by a variety of reasons, such as a car accident or natural catastrophe.
There could be many reasons for these expenses, such as:
- Payments to doctors
Crutches and wheelchairs
Addiction treatment programs
Home and hospital nursing care
Contacts, prescription or reading eyeglasses
Transport to and from the hospital
Other eligible expenses are also available as per the IRS. It is important to remember that expenses may not be included in the tax year for which you file. Usually, expenses not reimbursed by insurance your employer are not allowed.
Lifetime Learning Credit
A tax credit may be available for those who return to school later in their lives. The Lifetime Learning Credit is a credit, not a deduction that helps to offset college costs up to $2k annually.
This includes all types of continuing education:
- Undergraduate and Graduate degree courses
Courses for professionals
Vocational school courses
Courses at a community college
Other Tax Deductions Not Taken Into Account
There are many miscellaneous tax deductions that go unnoticed, in addition to those mentioned above. Keep reading to learn how you can reduce your next year’s taxable income.
Credit Tax Credit
A tax credit is better than a deduction due to its ability to lower your tax bill by a larger amount. It’s more painful to miss one than a deduction that reduces income subject to tax.
It’s easy to forget the Child and Dependent Care Credit, if you pay child care bills at work through a reimbursement account. The law allows for up to $5k in such expenses to be paid through a tax-favored reimbursement at work. The credit can be claimed on up to $6k of care expenses, but $5k can’t go towards tax-favored accounts.
If you spend more on work-related child care than the maximum $5k you have available through your plan at work, you may be eligible for the credit up to $1k. This would reduce your tax bill by about $200, assuming you only spend around 20% of the expenses. For households with lower incomes, the credit percentage increases. And note that there are new changes to the credit.