The tax code is incredibly complicated. It is far more common than you might think to overlook tax reduction strategies and potential tax savings. Some deductions and credits are missed more than others.
You can use this list to determine if you have missed some of the most common tax credits and deductions available for Americans. Catching these oversights can potentially save you hundreds in income taxes.
1. Deduct state sales tax
Seven US states currently do not have income taxes: Florida, Nevada, Alaska, South Dakota, Texas, Wyoming, and Washington. New Hampshire and Tennessee residents pay limited income taxes as well. In those states, it makes sense to deduct your sales taxes as an itemized deduction, instead of local and state income taxes.
The IRS has specific tables to indicate how much you can deduct for sales tax. However, if you made a large purchase this year, such as a vehicle, airplane, or boat, your sales tax may be greater than the table may indicate.
2. Account for reinvested dividends
If you, like many investors, have a mutual fund that automatically reinvests dividends for you, you may be able to reduce your capital gains tax rate in the future. This is because every time your dividends are reinvested, that increases your tax basis. This increase ultimately reduces your capital gain, which means you pay less in total for capital gains tax when you sell the asset.
Many people overlook this aspect and use the tax basis as the original cost of the property. However, the initial price may be much lower than the adjusted tax basis based on these reinvested dividends.
3. Refinancing your mortgage points
When you initially buy a home, you have the opportunity to deduct the points that you have paid toward your mortgage all at one time. However, you also have a similar opportunity when you refinance your mortgage. This deduction is often overlooked because it must be over the life of your loan instead of all at once.
For example, if you have a 30-year mortgage for your home, you can deduct 1/30 of the points each year. Although this may not seem like much money, over time it can add up. You can also deduct all of the remaining points not yet deducted when you refinance again or sell the home unless you are refinancing with the same lender.
4. Health insurance premiums
Health insurance often takes up a significant portion of an individual’s or family’s income. However, in most situations, you can only deduct health insurance premiums when they reach 10% of your adjusted gross income. Some states may also offer deductions for premiums paid that may be under this 10% limit.
Those who are self-employed and must pay for their own health insurance without an employer’s help can often deduct the complete cost of the medical insurance premium. This is an above-the-line deduction that can be extremely valuable for self-employed individuals.
5. Childcare expenses
Childcare or other dependent care can be extremely expensive, but you may be able to receive a tax credit for these costs. While most people know and understand that they can deduct direct payments to caregivers, they may not realize that other payments may also qualify for child care credit. For example, if your employer offers you a reimbursement account, you can still use that expense for the credit. However, the $6,000 limit that applies to other payments does not apply to the reimbursement account; the maximum is still $5,000 if you use a child care plan through your employer.
You may also be able to deduct childcare expenses related to paying a babysitter while you do volunteer work for a recognized charity. Technically, the IRS classifies payments to the babysitter as a charitable contribution. This type of deduction will simply be added to your total charitable donation.
6. Lifetime learning expenses
If you are considering taking a class to help with your employment or to switch careers, the extra motivation you need may come in the form of a tax deduction. The lifetime learning credit provides up to $2,000 per year for expenses related to college courses. However, the credit only applies to 20% of the total cost of the class or supplies, and it phases out at higher income levels.
7. Energy-efficient home improvements
You may be able to receive a credit for installing energy-efficient home appliances or other home improvements. The Nonbusiness Energy Property Credit was first developed in 2005, and it allows you credit for certain upgrades to your home, which can be worth up to $500.
Certain limits apply to different types of improvements, however. For example, you can only receive a credit of $200 for windows, $50 for any advanced main air circulating fan, and $150 for any qualified natural gas, hot water boiler, or furnace. Many homeowners make these upgrades without realizing they are eligible for the credit; although the total credit may be small, it is still money in your pocket after tax season.
8. Fees related to investments
Many investments require certain fees to perform activities, such as collecting interest and dividends. Any costs that you paid to a trustee, bank, or broker to collect on dividends on shares of stock or bond interest are deductible. Although these charges are often minimal, they can certainly add up over time.
Fees related to managing your investments also often qualify for miscellaneous deductions. These costs may include things like fees for investment consulting, attorney costs to collect taxable income, transportation costs related to visiting a financial advisor’s office, software and other online services you may use to manage your investments, and safety deposit rental fees. Take a hard look at the costs related to your investments and you will see that these expenses are often worth tracking and deducting.
Finding Deductions and Credits for You
Everyone has unique financial circumstances that qualify them for certain deductions and credits. It is virtually impossible to know and understand all of these on your own. The extensive resources available with Protect Wealth Academy can give you the tools you need to get the most out of your wealth management strategy, including free access to our video library. Tax planning and tax savings start with learning! Sign up for a free membership today!