The Most Overlooked Tax Deductions

Many tax-saving opportunities go unnoticed simply because people are unaware of them, or they find it difficult to keep up with the latest deductions, credits, and exemptions due to changes in tax laws. To help with this, we have compiled a list of the most commonly overlooked tax deductions that we typically see and that can help you save money on your taxes.

Capital Losses

This is especially important after a year like this one. Many people don’t realize that you can deduct capital losses on your taxes, subject to certain limitations of course. When you sell an investment such as stocks, mutual funds, or real estate for less than its original purchase price, you incur a capital loss. You can use these capital losses to offset capital gains in the same year. If your capital losses exceed your capital gains, you can deduct up to $3,000 of the net loss against your other income in that tax year. If the net capital loss is more than $3,000, you can carry over the excess amount to future tax years. Note that there are different rules for claiming capital losses on different types of assets, so it's a good idea to consult with a tax professional to ensure you are properly claiming your deductions.

Here’s a tip: This is how tax-loss harvesting works. With proper planning, you can proactively invest in a way to minimize your tax liabilities and increase your after-tax return. If you are investing in a non-retirement account and would like to learn more about investing in tax-advantaged strategies, don’t hesitate to reach out! 

Reinvested Dividends

When your mutual fund or stock pays you a dividend or capital gains distribution, that income is a taxable event (unless the investment is held in a tax-deferred account, like an IRA). If you're like most investors, you reinvest these payments in additional shares. The tax trap lurks when you sell your mutual fund or stock. If you fail to add the reinvested amounts back into the investment's cost basis, it can result in double taxation of those dividends. 

State Taxes

Did you owe state taxes when you filed your previous year's tax returns? If you did, don't forget to include this payment as a tax deduction on your current year's tax return. There is currently a $10,000 cap on the state and local tax deduction. You can also choose to deduct state sales tax instead of state income tax if it results in a higher deduction.

Student loan interest paid by you or your parent

Taxpayers can deduct up to $2,500 of student loan interest paid during the year, but they often forget to claim this deduction. What’s more, even if you weren’t the one to repay the loan, you can still claim the deduction. Typically, you can only deduct interest payments if you have a legal obligation to repay the debt. However, when a parent repays a child's student loans, the IRS treats the transaction as if the money was given directly to the child, who then used it to pay off their debt. If you are no longer claimed as a dependent, you may be eligible to deduct up to $2,500 of student loan interest paid by your parent(s) each year. To top it off, you don’t even have to itemize to claim this deduction! 

Job search expenses

Taxpayers who are searching for a job in their current field may be able to deduct expenses such as travel, resume preparation, and employment agency fees.

Charitable contributions

Donations made to eligible charities can be deducted, but taxpayers often forget to save receipts or track their contributions. And remember, it's not just cash donations that are deductible. If you donate goods or use your personal car for charitable work, these are potential tax deductions. 

Here’s a tip: If charitable giving is a priority for you, consider utilizing a charitable donor fund. It can offer a way to make a large charitable gift in one tax year, thus maximizing your tax savings, and then distributing the gift to charities over several years. In short, donor-advised funds can be a convenient way for individuals or families to support multiple charities over time, consolidate their giving, and simplify record-keeping. 

Medical and dental expenses

Taxpayers can deduct medical and dental expenses that exceed 7.5% of their adjusted gross income (AGI), but they often forget to keep track of these expenses.

Medicare Premiums

If you are self-employed (and not covered by an employer plan or your spouse's plan), you may be eligible to deduct premiums paid for Medicare Parts B and D, Medigap insurance, and Medicare Advantage Plan. This deduction is available regardless of whether you itemize deductions or not.

Home office expenses

Taxpayers who work from home may be able to deduct expenses related to their home office, including utilities, rent, and repairs.

Income in Respect of a Decedent

When an individual inherits an IRA or other retirement account, they are required to pay income tax on that inherited income. However, they may be able to take an itemized deduction for any estate tax paid on the same income. Additionally, if the IRD is paid out over several years, the beneficiary may be able to take a deduction for the portion of income tax paid on the IRD each year. However, the specific rules for IRD deductions can be complex, and it's often a good idea to consult a tax professional for guidance.

Gambling losses

Gambling losses can be tax-deductible, but only if you choose to itemize your deductions. It's worth noting that the deduction for gambling losses is limited to the amount of gambling winnings you report as taxable income. In addition to "traditional" gambling losses at places like casinos, the cost of non-winning bingo, lottery, and raffle tickets can also be considered tax-deductible gambling losses. If you're planning to claim this tax deduction, it's essential to keep all your gambling receipts, including losing tickets. The IRS recommends keeping a daily diary of your gambling activities, which should include the date and type of wagering, the name and location of the gambling establishment, the names of the people with you when you gambled, and the amounts you won or lost.

Child and Dependent Care

Childcare expenses can be a significant burden for many families. Fortunately, the child and dependent care tax credit can provide some relief. In 2022, if you paid a provider to care for your children who are under age 13 (or a disabled dependent of any age), you may be eligible for a non-refundable tax credit of up to 35% or $3,000 of qualifying expenses for one child. If you have two or more qualifying children, the credit can be as much as $6,000. This tax credit can also help cover the costs of caring for other dependents. For instance, if you're caring for an elderly parent who lives with you and is claimed as a dependent on your tax return, expenses related to their care may be eligible for the credit. 

Social Security Taxes If You Are Self-Employed

As a self-employed individual who is responsible for paying both the employer and employee portions of the Social Security and Medicare taxes, you can deduct half of what you pay (which amounts to 7.65%) on your tax return. This deduction applies to the Social Security tax portion of 12.4% on some of your net earnings and the Medicare tax of 2.9% on your net earnings. The best part is that you don't have to itemize deductions to claim this deduction on your federal income tax return.

Refinancing Points

If you purchase a home, you may be eligible to deduct the points you paid to obtain your mortgage. However, if you decide to refinance, the points on the new loan are generally deductible over the life of that loan. This means that if you have a 30-year mortgage, you can deduct 1/30th of the points paid each year, which works out to be $33 per year for every $1,000 of points paid. If you use a portion of the refinanced loan to make improvements to your home, you may be able to deduct the points related to those improvements. The remainder of the points would still need to be deducted over the life of the loan. In the event that you pay off the loan, whether by selling the house or refinancing again, you can deduct all of the points that have not yet been deducted. It's important to note that there is one exception to this rule. If you refinance a previously refinanced loan with the same lender, you must add the points paid on the latest deal to the leftover points from the previous refinancing. Then, you can deduct that combined amount gradually over the life of the new loan.

It's important to note that tax laws and deductions can vary depending on individual circumstances and location, so it's always best to consult with a tax professional for specific advice. If you don’t have a trusted tax professional, please reach out and we can connect you with one of our vetted partners! 

*The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.