Many Americans miss out on claiming applicable tax deductions every year! Check out our guide to common tax deductions so you can be more prepared next year.
Most people hate doing their taxes. It’s a complicated process, and you’re confused the entire time about whether you’ve done them correctly or not. But when done right, taxes can have many benefits (not to mention, they’re mandatory). Americans claim an estimated $1.2 trillion in tax deductions every year. To ensure that you’re getting your share of that $1.2 trillion, keep reading our guide to common tax deductions in the United States.
Tax Deductions Versus Tax Credits
Before we begin, it’s essential to understand the difference between tax deductions Define: Tax Deductions Reduce the amount of your income that’s subject to tax. and tax credits Define: Tax Credits Reduces your total tax bill. . These terms are often used interchangeably, but they have important distinctions.
Often, people donate to a charity when they’re in a generous mood and don’t think about it again. But your charitable contributions can be used as a tax deduction. You do have to ensure you’re donating to a qualified charity for the donation to be applicable to your taxes. Additionally, if your donation has a value of $250 or more, you should receive a receipt from the charitable organization.
Charitable tax deductions aren’t exclusive to monetary donations. While you can’t deduct the value of your time spent volunteering, you can deduct any travel expenses (including parking fees, tolls and 14 cents per mile driver) while volunteering. You can even deduct the fair market value of items you donate. Make sure to keep an itemized record of what you donate, which organization, the date and the valued amount.
State Sales Tax
A state sales tax deduction is primarily for those who live in states that don’t impose an income tax (such as Texas, Washington and others). In these states, individuals can choose between deducting state and local income taxes or state and local sales taxes. Generally speaking, the state and local income tax deduction is a better deal. You can use the IRS’s Sales Tax Calculator to see your total deduction amount.
Now more than ever, there’s a growing self-employed workforce, often referred to as the gig economy. If you are self-employed and use part of your home as an office to conduct business, you’re eligible for several home office expenses. These can include rent or mortgage interests, utilities, home maintenance, and more. The total amount you can claim for home office tax deductions is based on your office’s square footage area. However, note that you must use that home office space regularly and exclusively for business to be a legal tax deduction. The home office tax deduction comes with several restrictions, so make sure to do your research on this one!
Another potential tax deduction for the self-employed is mileage expenses. If you use your vehicle to conduct business, you can deduct 58 cents per mile driven. Additionally, you may have the option to claim a percentage of your vehicle expenses, such as insurance, gas, depreciation and repairs.
Medical and Dental Expenses
Some individuals may be able to use the Medical and Dental Expenses deduction for medical and dental expenses for themselves and their families. This deduction is applicable if your total medical and dental expenses exceed 7.5% of your adjusted gross income. Anything above the 7.5% can be deducted.
Let’s say your adjusted gross income is $60,000, and you incur $6,000 in medical expenses. Your medical expenses need to exceed 7.5% of $60,000, so a total of $4,500 can be tax deductible. As your total is $6,000, you can claim the difference of $1,500 on your taxes.
Student Loan Interest Paid
A student who’s not claimed as a dependent can qualify for up to $2,500 in student loan interest tax deductions. This can be claimed if it’s paid by the student or someone else (such as parents).
When parents pay your student loan, the IRS treats it as a monetary gift that the student puts towards debt. So, even if the parent pays for the student loan debt, the student can still claim it on their taxes.
Moving Expenses for Work
As of 2018, moving expenses for work are no longer tax deductible for federal taxes. However, there is an exception to this rule. If active-duty military personnel are forced to move for work, they don’t have to pay on qualifiable tax reimbursements.
Some of the potential expenses you can claim are lodging and travel costs for yourself and your family, moving household goods, and the costs for shipping your pets.
Jury Pay Paid to Employer
Some employers will continue to pay their employee’s full salary while they’re completing jury duty. If they do this, they often ask the employee to turn over their jury fees to the company. However, the IRS demands that you report those jury fees as taxable income.
If you transfer your jury pay to your employer, you’re allowed to deduct the amount, so you’re not taxed for the money merely passing from your hands to your employer’s.
Home Mortgage Points
Your mortgage points are prepaid interest on home mortgages. In some cases, these points can be deducted as home mortgage interest if you itemize deductions on your taxes. Other itemized deductions for property owners include mortgage insurance and property taxes.
Personal Casualty Losses
If you were the victim of an incident that the President declared to be a disaster, you might qualify for a tax deduction. This type of tax deduction includes the loss of your house, household items and vehicles that weren’t covered by insurance.
This is a unique tax deduction that a lot of people aren’t aware of. You can deduct gambling losses and expenses only to the extent of gambling winnings. So, if you spend $500 on lottery tickets, you can’t simply deduct this. Instead, you have to have won and report your winnings. You also can’t deduct more than the amount you win. So, if you want to claim $500 in lottery tickets, you have to have won at least $500.