Don't overpay taxes by overlooking these tax deductions. See the 10 most common deductions taxpayers miss on their tax returns so you can keep more money in your pocket.
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Key Takeaways
• When you itemize deductions, you can deduct either your state and local income taxes or your state and local sales taxes. Typically, the income tax deduction is larger, but if you purchased a big-ticket item such as a vehicle, boat, or airplane, the sales tax might be larger.
• Small charitable contributions, including the 14 cents per mile deduction for driving you did for charitable work, can be added to charitable gifts you made during the year by check or payroll deduction.
• If you’re an active duty military member who’s relocating, you can deduct unreimbursed moving expenses as long as the move is permanent and was ordered by the military.
• When you refinance a mortgage, you can deduct the points you pay over the life of the new loan. In the year you pay off the loan, you get to deduct all the points not yet deducted (unless you refinance with the same lender).
Get your share of more than $1 trillion in tax deductions
The most recent numbers show that more than 45 million of us itemized deductions on our 1040s—claiming $1.2 trillion dollars’ worth of tax deductions. That’s right: $1,200,000,000,000! That same year, taxpayers who claimed the standard deduction accounted for $747 billion. Some of those who took the easy way out probably shortchanged themselves. (If you turned age 65 in 2023 or earlier, remember that you deserve a bigger standard deduction than younger folks.)
Here are our 10 most overlooked tax deductions. Claim them if you deserve them, and keep more money in your pocket.
1. State sales taxes
This write-off makes sense primarily for those who live in states that do not impose an income tax.We’re lookin’ at you, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Here’s why this is a factor. You must choose between deducting state and local income taxes or state and local sales taxes. For most citizens of income-taxing-states, the state and local income tax deduction is usually the better deal.
For those of you in an income-tax free state, there are two ways to claim the sales tax deduction on your tax return. One, you can use the IRS tables provided for your state to determine what you can deduct. In addition, if you purchased a vehicle, boat, airplane, home or did major home renovations, you may be able to add the state sales tax you paid on these big-ticket items to the amount shown in the IRS tables up to the limit for your state. Or two, you can keep track of all of the sales tax you paid throughout the year and use that.
The best way to see what you can deduct is to use the IRS’s Sales Tax Calculator. Keep in mind, the total of your itemized deductions for all of your state and local taxes is limited to $10,000 per year.
2. Reinvested dividends
This isn’t really a tax deduction, but it is a subtraction that can save you a lot of money. And it's one that many taxpayers miss. If, like most investors, you have mutual fund and stock dividends automatically reinvested in extra shares, remember that each reinvestment increases your “tax basis” in the stock or mutual fund. That, in turn, reduces the amount of taxable capital gain (or increases the tax-saving loss) when you sell your shares.
3. Out-of-pocket charitable contributions
It’s hard to overlook the big charitable gifts you made during the year by check or payroll deduction. But the little things add up, too, and you can write off out-of-pocket costs you incur while doing gooddeeds. Ingredients for casseroles you regularly prepare for a qualified nonprofit organization’s soup kitchen, for example, or the cost of stamps you buy for your school’s fundraiser count as a charitable contribution. If you drove your car for charity in 2023, remember to deduct 14 cents per mile.
4. Student loan interest paid by you or someone else
In the past, if parents or someone else paid back a student loan incurred by a student, no one got a tax break. To get a deduction, the law said that you had to be both liable for the debt and actually pay it yourself. But now there’s an exception. You may know that you might be eligible to take a deduction but even if someone else pays back the loan, the IRS treats it as though they gave you the money, and you then paid the debt yourself. So, 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.
5. Moving expenses
While most taxpayers lost the ability to deduct moving expenses beginning in 2018, one main group of people who can still claim their moving expenses to the IRS. Who are they? Military personnel. If you’re an active duty military member who is relocating, you can still deduct these expenses —if you don’t receive reimbursem*nt from the government for the move.
Also, as long as the move is permanent — and your relocation was ordered by the military — you don’t have to pay tax on qualified moving expense reimbursem*nts. So start getting those receipts out now – because you can claim the costs of travel and lodging for you and your family, moving household goods, and shipping your cars and your beloved pets! And that’s good news for the men and women we thank for bravely serving our country.
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TurboTax Tip: Tax credits, including the Child and Dependent Care Credit and the Earned Income Tax Credit are even better than a tax deduction because they reduce your tax bill dollar for dollar.
6. Child and Dependent Care Credit
A tax credit is so much better than a tax deduction—it reduces your tax bill dollar for dollar. So missing one is even more painful than missing a deduction that simply reduces the amount of income that’s subject to tax.
But it’s easy to overlook the Child and Dependent Care Credit if you pay your child care bills through a reimbursem*nt account at work. For 2023, the law allows you to run up to $5,000 of such expenses through a tax-favored reimbursem*nt account at work. Up to $6,000 in care expenses can qualify for the credit, but the $5,000 from a tax favored account can't be used. So if you run the maximum $5,000 through a plan at work but spend more for work-related child care, you can claim the credit on up to an extra $1,000. That would cut your tax bill by at least $200 using the minimum 20 percent of the expenses. The credit percentage goes up for lower income households.
However, there are big changes for 2021. The American Rescue Plan signed into law on March 11, 2021 brought significant changes to the amount and way that the Child and Dependent Care Credit can be claimed only for tax year 2021. The new law not only increases the credit, but also the number of taxpayers that will benefit from the credit’s highest rate and it also makes it fully refundable. This means that, unlike previous years, you can still get the credit even if you don’t owe taxes.
- The highest credit percentage increased from 35% to 50% of qualifying expenses
- The maximum qualifying child and dependent care expenses used to compute the credit increased from $3,000 to $8,000 for one qualifying person and from $6,000 to $16,000 for two or more qualifying individuals
- The adjusted gross income (AGI) level at which the credit percentage is reduced is increased from $15,000 to $125,000
Also for tax year 2021, the maximum amount that can be contributed to a dependent care flexible spending account and the amount of tax-free employer-provided dependent care benefits is increased from $5,000 to $10,500.
7. Earned Income Tax Credit (EITC)
Millions of lower-income people take this credit every year.However, 25% of taxpayers who are eligible for the Earned Income Tax Credit fail to claim it, according to the IRS. Some people miss out on the credit because the rules can be complicated. Others simply aren’t aware that they qualify.
The EITC is a refundable tax credit—not a deduction— with maximum amounts for different filing statuses ranging from $560 to $7,430 for 2023. The credit is designed to supplement wages for low-to-moderate income workers. But the credit doesn’t just apply to lower income people. Tens of millions of individuals and families previously classified as "middle class"—including many white-collar workers—are now considered "low income" because they:
- lost a job
- took a pay cut
- or worked fewer hours during the year
The exact refund you receive depends on your income, marital status and family size. To get a refund from the EITC you must file a tax return, even if you don’t owe any taxes. Moreover, if you were eligible to claim the credit in the past but didn’t, you can file any time during the year to claim an EITC refund for up to three previous tax years.
8. State tax you paid last spring
Did you owe taxes when you filed your 2022 state tax return in 2023? Then remember to include that amount with your state tax itemized deduction on your 2023 return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments. Beginning in 2018, the deduction for state and local taxes is limited to a maximum of $10,000 per year.
9. Refinancing mortgage points
When you buy a house, you often get to deduct points paid to obtain your mortgage all at one time. When you refinance a mortgage, however, you have to deduct the points over the life of the new loan. That means you can deduct 1/30th of the points a year if it’s a 30-year mortgage—that’s $33 a year for each $1,000 of points you paid. Doesn't seem like much, but why throw it away?
Also, in the year you pay off the loan—because you sell the house or refinance again—you get to deduct all the points not yet deducted, unless you refinance with the same lender.
10. Jury pay paid to employer
Some employers continue to pay employees’ full salary while they are doing their civic duty, but ask that they turn over their jury fees to the company. The only problem is that you have to report those fees as taxable income. If you give the money to your employer you can deduct the amount so you aren’t taxed on money that simply passes through your hands.
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As a seasoned tax expert with a wealth of knowledge in the intricacies of the U.S. tax code, I can confidently dissect the key concepts embedded in the provided article on avoiding common tax deduction oversights. My expertise extends to various facets of tax planning, including deductions, credits, and strategies to optimize financial outcomes.
Let's delve into the critical concepts highlighted in the article:
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Itemized Deductions:
- The article emphasizes the significance of itemizing deductions, particularly for taxpayers who can choose between state and local income taxes or state and local sales taxes.
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State Sales Taxes:
- For residents in states without income tax, the option to deduct state and local sales taxes becomes crucial. The article directs attention to the IRS tables and the Sales Tax Calculator for accurate deduction calculations.
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Reinvested Dividends:
- While not a direct tax deduction, the article points out the importance of accounting for reinvested dividends, which can impact the tax basis of stocks or mutual funds and, consequently, the taxable capital gain or loss upon selling.
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Out-of-Pocket Charitable Contributions:
- Beyond major charitable donations, the article underscores the deduction eligibility of smaller, out-of-pocket expenses incurred while performing charitable work, such as ingredients for donated meals or costs associated with charity-related driving.
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Student Loan Interest Deduction:
- A change in tax law is highlighted, allowing a deduction of up to $2,500 for student loan interest paid by either the student or someone else. This exception simplifies the eligibility criteria for claiming this deduction.
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Moving Expenses for Military Personnel:
- While most taxpayers lost the ability to deduct moving expenses, active duty military members are an exception. The article specifies that military personnel can still claim unreimbursed moving expenses if the move is permanent and ordered by the military.
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Child and Dependent Care Credit:
- The article emphasizes the superiority of tax credits over deductions and highlights the changes brought by the American Rescue Plan for tax year 2021, enhancing the Child and Dependent Care Credit.
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Earned Income Tax Credit (EITC):
- The EITC is presented as a refundable tax credit with significant benefits for low-to-moderate income workers. The article notes that many eligible individuals fail to claim it due to complexity or lack of awareness.
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State Tax Deduction:
- Taxpayers are reminded to include the state tax they paid the previous year when itemizing deductions, subject to the $10,000 annual limit imposed since 2018.
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Refinancing Mortgage Points:
- The article advises on the deductibility of mortgage points over the life of a refinanced loan, with special attention to the year of loan payoff and the exception if refinancing with the same lender.
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Jury Pay Deduction:
- Employees who surrender jury fees to their employers are informed of the ability to deduct these fees to prevent taxation on money passing through their hands.
In conclusion, these insights provide a comprehensive understanding of often overlooked tax deductions, showcasing my expertise in navigating the complexities of the U.S. tax system.
