Top 5 Tax Deductions Most People Miss Out On
Many taxpayers miss out on valuable deductions simply because they aren’t aware of them. Claiming these deductions can significantly reduce your taxable income, potentially saving you hundreds—or even thousands—of dollars. Here are five commonly overlooked deductions and how you can maximize their benefits.
1. Home Office Deduction
If you use part of your home exclusively for work, you may qualify for a home office deduction. This deduction is available whether you’re a small business owner or an employee working from home.
Example: Jane, a freelance graphic designer, has a dedicated room in her home as her office. The room takes up 10% of her home’s total square footage. She can potentially deduct 10% of her utility bills, rent, and home maintenance expenses as part of the home office deduction.
Resources: IRS Publication 587 provides detailed guidelines on how to calculate and qualify for the home office deduction. You can also check out the IRS Home Office Deduction page for simplified and regular deduction methods.
2. Student Loan Interest Deduction
If you’re paying off student loans, you might be eligible for a deduction of up to $2,500 on the interest paid, even if you don’t itemize your taxes. This can be a great help, especially if you’re starting your career and have substantial loan payments.
Example: Mike paid $1,800 in interest on his student loans last year. Since his modified adjusted gross income (MAGI) is below the income limit, he qualifies to deduct this full amount, reducing his taxable income by $1,800.
Resources: The IRS Student Loan Interest Deduction webpage explains the deduction criteria, including income limits and eligibility requirements.
3. State Sales Tax Deduction
If you itemize deductions, you can choose to deduct either your state income tax or state sales tax. For those living in states with no income tax, this can be especially beneficial.
Example: Sarah lives in Florida, which has no state income tax. She made several large purchases, including a new car. By opting to deduct her state sales tax instead of state income tax, Sarah can include the sales tax paid on her car, potentially saving her hundreds of dollars.
Resources: IRS Topic No. 503 provides insights into choosing between state and local income tax versus state sales tax, along with the benefits of each.
4. Medical and Dental Expenses
You may be able to deduct medical and dental expenses that exceed 7.5% of your adjusted gross income. This includes out-of-pocket expenses like prescriptions, medical supplies, and even travel expenses for medical care.
Example: Tom and Lisa had combined medical expenses of $5,000 last year. With an adjusted gross income of $40,000, they could deduct the amount over $3,000 (7.5% of their AGI), which means they can deduct $2,000 of their medical expenses.
Resources: IRS Publication 502 outlines deductible medical and dental expenses, including a detailed list of eligible expenses.
5. Charitable Contributions
If you donate money or goods to a qualified charity, you can deduct the fair market value of those items. This applies even if you don’t itemize, thanks to the temporary charitable deduction for non-itemizers in certain tax years.
Example: Emily donated used clothing and furniture to a local charity. She estimated the fair market value of the items to be $600. By keeping receipts and obtaining a receipt from the charity, she can deduct this amount from her taxable income.
Resources: IRS Publication 526 provides rules on charitable contributions, including how to value and report donations. The IRS has a dedicated page for Charitable Contribution Deductions as well.
By understanding and leveraging these commonly missed deductions, you can significantly lower your tax burden. Reach out to us today for personalized tax preparation services and ensure you’re not leaving money on the table.
Disclaimer: The information provided in this blog is for general informational purposes only and should not be considered tax, legal, or financial advice. While we strive to ensure the accuracy and reliability of the content, we do not guarantee it and accept no responsibility for any errors or omissions. Tax laws are subject to change, and individual circumstances can vary. Always consult with a qualified tax professional before making any decisions regarding your taxes or finances.
