When tax season rolls around, many taxpayers leave money on the table simply because they overlook key deductions. While the standard deduction offers simplicity, itemizing your deductions could lead to significant savings if you qualify. With proper record-keeping and attention to detail, these often-missed deductions can help you keep more of your hard-earned income. Let’s break them down so you can maximize your tax refund this year.
Federal Itemizing and the Updated Standard Deduction: What You Need to Know
When filing your federal tax return, you face a key decision: take the standard deduction or itemize your deductions one by one. The Tax Cuts and Jobs Act of 2017 (TCJA) brought significant changes to the way individual taxes are calculated, including deductions. One major update was the increase in the standard deduction, but it also eliminated or limited certain expenses that previously qualified for itemization. As of 2022, the standard deduction is $12,950 for single filers and $25,900 for married couples filing jointly.
Itemizing only makes financial sense if the total of your deductions exceeds the standard deduction amount. For example, if you have large medical expenses, high property taxes, or charitable contributions, it might be worth calculating your itemized total to see if it saves you more money. Understanding these options is key to maximizing your tax savings and ensuring you don’t miss out on potential benefits.
Charitable Deductions
When you donate money to charities or nonprofits, you can deduct those contributions on your individual taxes—but donations to political campaigns are not eligible for deduction..
In addition to cash donations, you can also write off the “fair market value” of non-cash items such as food, clothing, or household goods. If you volunteer, you can deduct certain out-of-pocket expenses like gas, mileage, or bus fare related to your volunteer work. However, keep in mind that the value of your time or services cannot be deducted.
It’s important to note that charitable deductions are only available to taxpayers who itemize. If your total deductions don’t exceed the standard deduction, itemizing for charitable contributions may not be beneficial.
Understanding these rules helps ensure you make the most of your generosity come tax season.
Medical Expenses
If you itemize your deductions, you may qualify to deduct significant out-of-pocket medical expenses, especially those incurred during the pandemic or other major health events.
At the federal level, you can deduct medical expenses that exceed 7.5% of your adjusted gross income (AGI). For example, if your AGI is $100,000 and you spent $12,000 on medical bills, you can deduct $4,500. This threshold means only expenses beyond the first 7.5% of your AGI are deductible.
If you’re self-employed, you have an added benefit—you can deduct your health insurance premium payments directly, whether or not you itemize.
Additionally, keep in mind that some states allow you to deduct medical expenses with a lower threshold than required for your federal tax return. Checking your state’s rules could help you save even more.
Understanding these deductions can significantly reduce your tax burden while covering essential health care costs.
Work Tax Deductions: What’s Still Available After the TCJA
The Tax Cuts and Jobs Act (TCJA) eliminated deductions for unreimbursed work expenses, such as office supplies, but there are still a few work-related deductions you can take advantage of.
If you started your first job and had to move at least 50 miles for it, you can deduct certain moving expenses, including transportation, lodging, and shipping costs for your belongings. This deduction can help offset the financial burden of relocating for work.
Another often-overlooked deduction relates to jury duty. If your employer continued paying your salary while you served on a jury and required you to forward your jury duty pay to them, you can deduct the amount you handed over.
Even though work-related deductions have been scaled back, knowing what still qualifies can ensure you don’t miss potential savings on individual taxes.
Child and Dependent Care Tax Credit
The Child and Dependent Care Tax Credit is a valuable way to offset the costs of child care, such as paying for a nanny, daycare, or other eligible expenses.
Many taxpayers overlook this credit if they pay child care costs through a dependent care flexible spending account (FSA), which is already tax-free. However, you can still claim the credit for any qualifying expenses that exceed what the FSA covers. For example, if you spent $7,000 on child care and used $5,000 from your FSA, you could claim a $2,000 tax credit for the difference.
What makes this credit especially beneficial is that it reduces your tax bill dollar for dollar, unlike a deduction, which only lowers your taxable income.
Being aware of how this credit works can help you maximize your savings while managing child care costs.
Home Office Deduction
If you started working from home during COVID-19, you may have set up a home office—but the home office deduction is no longer available for W-2 employees due to the Tax Cuts and Jobs Act (TCJA). However, if you’re self-employed, this deduction can still save you money.
To qualify, your home office must meet two key criteria: it must be used primarily for work and serve as your main place of business. This includes detached structures like garages, sheds, or studios, as long as they are used exclusively for work.
Your deduction is calculated based on the percentage of your home used for the office. For example, if your office space is 15% of your total home square footage, you can deduct 15% of expenses like mortgage interest, rent, utilities, and maintenance.
Understanding the requirements can help self-employed individuals make the most of this valuable deduction.
Earned Income Tax Credit (EITC): A Lifeline for Families with Lower Incomes
The Earned Income Tax Credit (EITC) is a powerful tax benefit designed to help families with lower incomes. Unlike deductions, which reduce taxable income, the EITC directly lowers the taxes you owe—and because it’s refundable, you can receive the difference as a refund if the credit exceeds your tax liability.
The amount of the credit depends on your income, household size, and the number of qualifying children. For example, for the 2022 tax year, single filers without children qualify if they earn $16,480 or less. Married couples with children can qualify with a joint income up to $59,187.
This credit can significantly boost a family’s financial well-being, making it critical to check eligibility and claim it if you qualify. It’s one of the most impactful ways to reduce individual taxes for those who need it most.
Military Deductions and Credits: Tax Benefits for Service Members
Military service members have access to unique tax benefits designed to support their sacrifices. For example, they can deduct moving expenses for permanent change of station orders, regardless of whether it’s for their first job or subsequent relocations.
Additionally, the cost of purchasing and maintaining uniforms is deductible, as long as those uniforms are not suitable for everyday wear.
Another key advantage involves combat pay. While it’s nontaxable, it still counts as earned income for the Earned Income Tax Credit (EITC), potentially increasing the credit amount and providing significant financial relief.
By understanding and utilizing these military-specific deductions and credits, service members can reduce their tax burden and maximize their benefits.
State Sales Tax Deduction: A Flexible Option for Tax Savings
The IRS allows you to deduct either your state income taxes or state sales taxes, giving you flexibility to choose whichever provides the greatest benefit. This deduction is particularly valuable if you live in a state without an income tax, such as Florida, where sales tax becomes the default choice.
To simplify the process, the IRS offers tools to estimate the total sales tax you paid during the year based on your location and spending habits. This helps you compare whether claiming a deduction for sales taxes or income taxes would result in greater savings.
By taking advantage of this option, taxpayers can reduce their federal tax bill while accounting for the individual taxes they paid at the state level.
Student Loan Interest and Payment Tax Benefits
If you’re repaying student loans, the IRS allows you to deduct up to $2,500 a year in interest paid on your loans. What’s unique about this deduction is that you can claim it even if someone else voluntarily makes payments on your behalf, as long as they’re not a cosigner legally obligated to pay.
For added relief, a special tax break is available for employer contributions toward student loans. From March 27, 2020, through December 31, 2025, employers can pay up to $5,250 annually toward your student loans, and these payments are excluded from your taxable income—saving you money while helping reduce your debt.
These options can make a meaningful difference in managing student loan repayment while lightening your tax burden.
Other Tax Deductions You Need to Know About
Tax laws are constantly evolving, and with the Tax Cuts and Jobs Act (TCJA) of 2017, many taxpayers were left grappling with significant changes to what they can and can’t deduct. While the TCJA simplified some aspects of tax filing, it also eliminated several deductions, particularly under the category of “miscellaneous itemized deductions.” Let’s break down what’s no longer deductible, what remains, and how you can make the most of the deductions still available to you.
What’s No Longer Deductible?
Before the TCJA, many taxpayers benefited from miscellaneous itemized deductions. However, the TCJA wiped out most of these, including deductions that were previously subject to the 2%-of-AGI threshold. Under this rule, you could only deduct the portion of qualifying expenses that exceeded 2% of your adjusted gross income (AGI). These are the deductions that are no longer allowed:
Unreimbursed Job Expenses:
- Work-related travel costs, union dues, and other job-related expenses that weren’t reimbursed by your employer.
Unreimbursed Moving Expenses:
- Costs incurred for moving to take a new job, unless you’re an active-duty member of the military moving under orders.
Investment Expenses:
- Advisory fees, management fees, and other costs related to managing your investments.
Tax Preparation Fees:
- Fees paid for preparing your individual taxes, except for the preparation of Schedules C (business income), E (rental income), or F (farm income), which remain deductible as business expenses.
Fees to Contest an IRS Ruling:
- Legal or professional fees paid to dispute a decision by the IRS.
Hobby Expenses:
- Costs associated with hobbies, even if you earned some income from them.
Personal Casualty or Theft Losses:
- These are no longer deductible unless the loss occurred in a federally declared disaster area.
What’s Still Deductible?
Although many deductions were eliminated, several important ones remain, giving you opportunities to reduce your taxable income if you qualify. Here are the deductions that survived the TCJA:
Gambling Losses:
- You can deduct gambling losses up to the amount of your reported winnings. Be sure to keep detailed records, including receipts, tickets, and logs.
Investment Interest:
- If you borrow money to make an investment, you can deduct the interest paid on the loan, provided it doesn’t exceed your net investment income.
Casualty and Theft Losses on Income-Producing Property:
- Losses related to property that generates income, such as rental property, remain deductible.
Federal Estate Tax on Inherited Income:
- This applies to income-producing assets such as IRAs and retirement benefits inherited from an estate.
Impairment-Related Work Expenses:
- People with disabilities can still deduct expenses for work-related items needed to perform their jobs, such as special equipment or modifications.
Student Loan Interest:
- You can deduct up to $2,500 or the total interest you paid on student loans in the tax year, whichever is less. This deduction is available even if you don’t itemize.
How These Changes Affect You
The elimination of many miscellaneous deductions means fewer opportunities to reduce your taxable income, especially for those who previously relied on the 2%-of-AGI rule to claim deductions. However, there are still ways to optimize your tax savings:
- Focus on What Remains: For example, deductions for gambling losses and student loan interest can still provide meaningful reductions in your taxable income.
- Explore Other Categories: Beyond miscellaneous deductions, consider maximizing deductions for charitable giving, medical expenses, or homeownership-related costs if you qualify.
- Consider Business Expenses: If you’re self-employed or run a small business, deductions tied to your trade, such as home office expenses and vehicle use, remain powerful tools to reduce your tax burden.
Tips for Maximizing Your Tax Savings
Whether you’re deducting gambling losses or claiming impairment-related work expenses, meticulous record-keeping is your best defense if you’re ever audited by the IRS. Keep receipts, contracts, invoices, and other documents that substantiate your claims.
For instance:
- When deducting student loan interest, ensure you have documentation from your loan servicer detailing the amount of interest paid during the year.
- If claiming gambling losses, maintain a log with dates, locations, amounts wagered, and outcomes.
- For deductions like investment interest, keep detailed loan agreements and proof of payments.
Keep Detailed Records: Receipts, logs, and other documentation are essential for proving eligibility if audited.
Use Tax Preparation Software: Many tools can identify deductions you might otherwise miss.
Work with a Professional: A tax advisor can help you navigate complex rules, especially if you have multiple deductions to consider.
Maximizing Your Tax Savings
While the TCJA eliminated many deductions, the remaining ones can still provide significant savings when leveraged strategically. Here are some tips to ensure you get the most out of your deductions:
- Double-Check What’s Eligible: Even if you think an expense isn’t deductible, it’s worth reviewing IRS guidelines or consulting a tax professional to confirm.
- Use Tax Preparation Software: Modern tax tools are equipped to help you identify eligible deductions and calculate savings.
- Plan Ahead for Next Year: Knowing your deduction eligibility now helps you make smarter financial choices all year.
The tax landscape continues to evolve, and many provisions of the TCJA are set to expire in 2025. This means previously eliminated deductions could return, but it also creates uncertainty for taxpayers. Staying informed and proactive will help you adjust your strategies as tax laws change.
Conclusion
Maximizing tax deductions requires diligence, awareness, and planning. Many deductions were eliminated under the TCJA, but opportunities remain. Examples include charitable contributions, medical expenses, and student loan interest. Keep detailed records and leverage credits like the Earned Income Tax Credit. Explore remaining deductions to optimize savings and reduce your tax burden. Use tax preparation software or consult a professional to avoid missing savings. As tax laws evolve, staying informed helps you make smarter financial decisions annually.
FAQs
What are the most commonly overlooked tax deductions?
Charitable contributions, medical expenses exceeding 7.5% of AGI, and home office deductions for self-employed individuals are often missed.
Can I still deduct work expenses under the TCJA?
Unreimbursed work expenses are no longer deductible unless you’re self-employed or qualify for specific exceptions like jury duty offsets.
Is the home office deduction available for employees working remotely?
No, W-2 employees cannot claim the home office deduction, but self-employed individuals still qualify under strict rules.
How does the Child and Dependent Care Tax Credit benefit me?
It directly reduces your tax bill by covering qualifying childcare expenses not fully reimbursed by a dependent care FSA.
Can I deduct state sales tax instead of state income tax?
Recent Comments