10 Tax Deductions You Shouldn't Miss
Tax codes are always changing, and deductions come and go — making many easy to overlook.You spent the year saving receipts and keeping records. Perhaps you have a nifty, color-coded file folder system to keep track of all your tax documents or an app on your phone that lets you scan in each document for safe keeping as soon as you open it.
You hire the best accountant or buy the best tax prep software. Or maybe you do both to run a nerdy, John Henry-esque battle between accountant and computer.
Guess what? You're still going to miss some deductions that could save you hundreds or even thousands of dollars on your tax bill.
Sure, the tax codes will be vastly different next year with the recently approved changes, but don't miss out on savings you can find this year. The codes are always changing, and deductions come and go. At the same time, your life changes just as fast: get married, have a kid, but a house or, God forbid, become disabled, and you have a whole new set of deductions to understand and consider.
We asked some of our favorite tax prep and finance pros for the most common deduction oversights they see among taxpayers. Their advice follows, and our hope is these deductions will be a little less overlooked come April 15.
Don't Overlook The Standard Deduction
In 2013, 68.5 percent of taxpayers took the standard deduction. Dock David Treece, a financial analyst with FitSmallBusiness.com, thinks that number should be higher.
"One of the biggest tax mistakes that Americans make is overlooking the standard deduction. When they start thinking about taxes, people usually go straight to looking for itemized deductions," Treece said. "In reality, many people would benefit more from using the standard deduction, rather than trying to itemize deductible expenses."
The Standard Deduction Is On The Rise
That advice is even more valuable now. In 2018, the standard deduction amounts are expected to increase to $12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples filing jointly and surviving spouses. People who are blind, disabled or over 65 can add another $1,300 to their standard deduction.
Are You Eligible For The Earned Income Tax Credit?
If you make less than $54,000 per year, you may be eligible for the Earned Income Tax Credit, which could save you anywhere from $510 to $6,318 in 2017, according to Kevin Harris, director of marketing for Goldin Peiser & Peiser LLP in Dallas.
This is a refundable credit to aid low- and moderate-income taxpayers. Eligibility is determined by income, marital status, and family size.
Help For Parents With Young Children
A lot of parents know about the Child and Dependent Care Tax Credit, which allows you to deduct $600 for one child and $1,200 for two. "What most families don’t know is if they have two or more dependents, they may actually be able to take advantage of both of these tax deductions, which can save families up to $2,500 per year," Natasha Gavilanez with Care.com said.
But $2,500 isn’t going to cover the costs of even the shoddiest day care fees. One-in-three families responding to a Care.com survey said they spend 20 percent or more of total income on child care. Fortunately, there are a number of tax breaks for those families – so many that it's easy to overlook many of them.
There are no income limits for deducting daycare expenses, Gavilanez said, as long as both parents work and can demonstrate that the daycare is work-related. Sorry, but the wages you pay the nanny who watches your kids while you play tennis doesn't qualify for the deduction.
FSAs Can Help With Daycare Too
Gavilanez said her company's recent survey showed that a third of families didn’t realize that work-sponsored Flexible Spending Account plans could save them an average of $2,300. And even those that did know about FSA's and had one through their employer weren't taking advantage of it, as just 44 percent set aside pretax earnings to the accounts.
Homeowner? Don't Forget Your Homeowner's Insurance
Homeowners know that they get far more tax breaks than renters, but David Hryck, a tax lawyer and partner with Reed Smith, sees a lot of homeowners missing out on a crucial deduction.
"A tax break that I see many people overlook on a consistent basis revolves around private mortgage insurance," Hryck said. "Taxpayers are allowed to deduct their premiums for private mortgage insurance. It's important to know that the deduction can be anywhere from $50 to $200 per month on a loan in the neighborhood of $250,000."
Deducting Mortage And Refinancing Points
Another break Hryck says homeowners should take advantage of is a deduction for points paid to get a mortgage. When refinancing, those points can be deducted over the life of the 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," he said. "While it's a small sum, it's still worth taking advantage of. It's also important to note that in the year you pay off the loan due to selling the house or refinancing once again, you get to deduct all the points not yet deducted, unless you refinance with the same lender."
The New Tax Law Makes It Easier To Deduct Medical Expenses
Under the old tax law, medical expenses had to exceed 10 percent of income before they could be deducted. Now that number has dropped to 7.5 percent, but many people who had big medical bills may not be aware of the change, according to Lou Haverty, a CFA with Financial Analyst Insider.
"This change probably most benefits those people in retirement since they are more likely to incur higher than expected medical expenses and may not earn as much as they did prior to retirement," said Haverty, who added that you need to itemize deductions to qualify.
The lower threshold applies to the 2017 and 2018 tax years, and AARP is lobbying to make it permanent.
Deductions for Movers and Job Seekers
If you moved 50 miles or more in 2017, don't forget to deduct 23 cents for every mile you had to cover to get you and your stuff to your new hometown.
That's a fairly standard deduction your accountant or even your tax prep software can you tell you about, but there may be more to consider if you spent time job hunting in 2017, according to Natasha Rachel Smith, a personal finance expert at TopCashback.com.
"Some job-search costs can be deductible, provided you spend more than 2 percent of your pre-tax salary, if you’re seeking employment in the same field you currently work in," Smith said. "Deductible items include: transportation to and from job interviews, the costs of printing your resume and lodging/food costs if you need to stay overnight."
Keep in mind, this may be the last year you can take those deductions: the Trump administration removed the job hunting deduction for 2018.
Deducting State and Local Sales Taxes
Most taxpayers know that they are able to deduct state and local taxes, but Harris said many think it only applies to income taxes. But Schedule A allows taxpayers to choose between deducting income or sales taxes. It's important to note that beginning in 2018 the deduction for sales tax will be capped at $10,000.
"For those taxpayers that live in a state that levies income tax, this is usually the best option. However, taxpayers not required to pay state income tax still have the option to deduct state sales taxes," Harris said.
Recent Retirees Should Take Note
The IRS provides tables that determine the amount of the sales tax deduction based on income and state of residence. The deduction can be adjusted for big purchases, such as a car, boat, or jewelry. Taxpayers can choose not use the table and keep track of sales tax paid on every purchase throughout the year, Harris said.
"This may not be worth the trouble for most taxpayers, but this can be advantageous for taxpayers that expect their taxable income to be low but their consumption to be high," he said. "A primary target for this would be recent retirees, as their income may be reduced upon retirement from tax-exempt income or tax-free distributions from retirement accounts, but their standard of living (spending) has not changed."
The Airbnb Deduction
The home-sharing phenomenon — people renting their homes through sites like Airbnb and Home Away — is so new that some people who use the sites may be unnecessarily paying taxes while others may be missing out on deductions.
Robert Stephens, general manager of Avalara MyLodgeTax, a site that helps property owners with tax prep for their rental properties, said if you rent your home for 14 or fewer days in a year, you don't have to pay taxes on rental income.
Full-time Rental Properties
On the other side of the equation, there are several deductions available to property owners who use their house exclusively as a rental. These include leaning fees, ongoing repairs, property taxes, mortgage interest, utilities, and insurance.
"Also, fees such as Airbnb's host-service fee can be deducted from earnings," Stephens said.