Tax season is right around the corner, and allAmericansare hoping they will not owe Uncle Sam this year. They are actually hoping to get something back in the form of a healthytax refund. I know that most of us want to keep our money in our own wallets, not Uncle Sam’s.
Therefore, I have written this post to help you file yourtax returnwith as little stress as possible and how to take advantage of everytax deduction, whether as astandard deductionor useitemized deductions, that is available to you. I have even included a couple oftax creditsyou may be able to use.
Standard Deductionv.Itemized Deductions
Whether you complete atax returnon your own or use an accountant to file your taxes for you, there are many things thattaxpayersshould be aware of to get amaximumreturn on theirincome taxes. The first decision ataxpayershould make is if they will use thestandard deductionfor the year or if they will useitemized deductions.
Taxpayersshould think about this at the start of thetax yearbecause you will need to keep files on sales receipts,tax credits(including childtax credits),mortgage interest,health savings accounts,charitable donations,IRA contributions(whetherRoth IRAorTraditional IRA),home office deductions,capital gains, and other opportunities to lower thetax rate.
StandardTax Deductions
What does that actually mean? How do I know if I should file astandard deduction?
TheIRSlets you take thestandard deductionon a no-questions-asked basis. Thestandard deductionreduces the amount ofgross incomeyou have to pay taxes on. Thestandard deductionis a specific dollar amount that reduces yourtaxable income. For the 2021tax year, thestandard deductionis $12,550 for single filers and married filing separately $25,100 forjoint filersand $18,800 for the head of household.
If yourstandard deductionis less than youritemized deductions, you probably should itemize and save money.
ItemizedTax Deductions
According to theIRS, you should consider itemizing your deductions if your allowableitemized deductionsare greater than yourstandard deductionor if you must itemize deductions because you can’t use thestandard deduction.
Itemized deductionsinclude amounts you paid for state and local income or sales taxes, real estate taxes, personalproperty taxes,mortgage interest, and disaster losses. You may also include gifts to charity and part of the amount you paid for dental andmedical expenses. See theInstructions forSchedule A(Form 1040)to determine whatexclusionsmay apply when itemizing yourtax deductions.
One note of point regarding standard versusitemized deductions– you may choose to use thestandard deductionto save time on filing even if you qualify for itemizations.
You can learn more about thestandard deductionsanditemized deductionsby visiting theIRSwebsite orNerd Wallet.
Most OverlookedTax Deductions
Once you have decided to use the itemizedtax deductions, you need to be aware of what qualifies as atax deduction.
Check out thesemost overlookedtax deductions. You will want to keep these deductions in mind whenever tax season hits so that you keep your money instead of paying Uncle Sam. There are various resources for knowing what qualifies as anitemized deduction, from theIRStoTurbo Tax.
- State Sales Tax –For thosetaxpayersliving in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming, you do not pay a stateincome tax(Lucky!). Therefore, it may benefit you to itemize any sales taxes you paid during the year. Why is this important? Because you must choose between deducting state and localincome taxesorstate and local sales taxes. You cannot file both. For most citizens of income-taxing states, the state and localincome taxdeduction is usually the better deal.
- Student Loan Interest–Those peskystudent loanscan go away for just a second as you bask in the gloriousness of getting some rate of return on them.Student loanshave outrageous interest rates, so it’s nice to get that student loantax deductionat the end of the year. Keep in mind that a student who’s not claimed as a dependent can qualify to deduct up to $2,500 ofstudent loan interestpaid by the student or a parent.
- Charitable Donations(Out-of-Pocket) –Do not overlook thecharitable donationsthat you made throughout the year because all those little donations do add up and you can deduct out-of-pocket costs you incur while being a good citizen. Turbo Tax provides a good article on how to deduct all thosecharitable donations. If you drove your car for a charity during the year, you can also deduct $0.14 per mile. Also, keep track of thosecash donationsby getting a receipt.
- Moving Expenses (Military Personnel) –Active military personnel may still claim moving expenses as long as the government has not reimbursed said personnel for these costs. Also, if the move was ordered by the military and considered permanent, military personnel do not have to pay tax on qualified moving expense reimbursem*nts. This is great news for our military personnel who are serving this great country. Start saving those receipts now so you can claim travel and lodging expenses for you and your family and the cost of moving your belongings and cars. You can even deduct the cost of moving your beloved fur babies!
- Other Military Travel Expenses– Here is a bit of more good news for military personnel! Travel expenses and lodging costs for drills and meetings may also be deductible. Be sure to research what exactly qualifies as a deduction as the tax laws change year to year.
- Child Care and Dependent CareTax Credit–This is atax credit, not a deduction, which is better for you thetaxpayer. If you’re a parent that has sent your child to daycare this year, keep in mind that you’re eligible for atax deduction. You will want to make sure your caregiver is aware you will be turning their information in as you do your taxes, this way they’re not surprised in any way, shape, or form. Turbo Tax has another good article explaining theIns and Outs of The Child Care and Dependent CareTax Credit.
- Being a Caregiver –Not many people know about thistax deduction. However, being a caregiver may qualify you to receive a tax reduction as they are your dependent whenever you’re caring for them. You can typically deduct the cost of caring for them for things like in-home care.
- American Rescue Plan(Signed into Law on March 11, 2021) –This plan brought about big changes for 2021. This new law brought about significant changes to the way and amount that thetaxpayercan claim the child and dependent care expenses for thetax year2021. The plan increases the creditandthe number oftaxpayersthat will benefit from the credit’s highest rate. It also makes it fully refundable!
- PayPalFees–If you are a professional orsmall business ownerthat uses PayPal on a daily basis, you know the sting of thefeesassociated with it. You can easily deduct this as a business expense. While you will not get the full amount back, you may still receive a nice chunk of atax deduction.
- Earned Income Tax Credit(EITC) –Here is anothertax credit. According to theIRS, manytaxpayersfail to file their EITC each year. The EITC was established to supplement wages for low to moderate-income employees. Turbo Tax provides an article discussing the5 Facts About theEarned Income Tax Credit.
- Refinancing Mortgage Points –ManyAmericansmay not be aware of thistax deduction. When you buy a house, you are eligible to deduct points paid to obtain your mortgage all at one time. However, when you refinance your mortgage, you have to deduct the points over the life of the loan. How much is that worth to you? It is worth $33.00 per $1,000 worth of points you paid. Also, when you pay off that mortgage, you get to deduct all the points not yet deducted.
- Miscellaneous Expenses-Most people ignore thistax deductionbecause they get too nervous to use it. It can be hard to know what qualifies as “miscellaneous” in terms of the government. A good example of this type of deduction would be deducting costs associated with transportation expenses whilejob hunting. Sometimes you can deduct miles that you’ve put on your vehicle due to a job. Always check with a professional to make sure you qualify for specific miscellaneous expenses.
- PersonalProperty Taxes–If you have paidproperty taxesthis year, you may be eligible for atax deduction.
In addition to the above list, don’t forget about any personal retirement plans that you may have, such as an Independent Retirement Account or IRA. You can visit theIRSwebsite to learn more about IRAtax deductionsin their articleTopic No. 451 Individual Retirement Arrangements (IRAs).
Also, if you own a small business or you are self-employed, theIRShas information regardingtax cutsthat you can take each year.
Keep in mind that taxes are not the same for everyone. What you may qualify for, someone else may not. Keep thesetax deductionsin mind whenever it’s time to file.
Do you have any overlookedtax deductionsto add to the list? Please let me know.
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