• July 15, 2024

Bet You Didn’t Know About These Top 10 Tax Deductions That $ave Big Bucks!

Tax time is around the corner and dealing with the IRS tax code is just about as frustrating and confusing as it gets. Here are some of the IRS’s secret tax deductions you don’t want to miss as you file your returns.

Americans could be overpaying millions of dollars’ worth of taxes each year by overlooking simple credits and deductions. Often times, accountants may not be familiar enough with an individual’s or family’s situation to proactively recommend these credits. A few minutes spent reviewing these tax credits and deductions to notify an accountant can potentially save thousands of dollars per year on an individual’s or family’s tax return.

Let’s take a look at some of the most commonly overlooked tax deductions and how you can take advantage of them this year. (For related reading, see: 7 Overlooked Tax Deductions.)

Education Credits

The American Opportunity Credit covers 100% of the first $2,000 spent on qualifying college expenses and 25% of the next $2,000 for a maximum annual credit of $2,500 per student for all four years of higher education. Those making less than $80,000 per year in adjusted gross income—or $160,000 per year for a married couple—qualify for the full credit. If you’re making more than that, it’s phased out over a series of income brackets.

For those that are long out of school, there’s also a credit designed to help make continuing education more affordable. The Lifetime Learning Credit is worth up to $2,000—or 20% of up to $10,000—spent on qualifying post-high school courses that lead to new or improved job skills. As with the American Opportunity Credit, the benefit phases out for those making more than $55,000 to $65,000 individually or $110,000 to $130,000 for couples.

Loan Deductions

Most interest deductions, such as mortgages and student loans, are only applicable to individuals legally required to repay debt. But if parents are paying a child’s student loans for them, the IRS considers it a cash payment to the child as long as they’re no longer claimed as a dependent. Students in this situation can deduct up to $2,500 of student loan interest each year, and they don’t even have to itemize their tax return.

When it comes to housing, many people forget the refinancing an existing mortgage can create a tax deduction. The points paid to refinance a mortgage can be deducted over the life of the loan. This may not be as sizeable as the immediate deduction when buying a new home, but it’s worth including to help offset some taxes at the very least. If you sell a home or pay off a loan, you can deduct all of the un-deducted points left on the mortgage as well. (For related reading, see: 6 Tax Deductions That Might Get You Audited and Are Estate Planning Fees Tax Deductible?

Job Deductions and Credits

The unemployment rate may be below 5%, but the long-term unemployed have been seeking employment for a long time. Fortunately, they may be able to deduct some expenses incurred during the job search, including nearly 60 cents per mile in transportation costs, employment agency fees, printing costs for resumes, cab fares, and food and lodging away from home. The costs can even be deducted if the person doesn’t land a job.

For families with two working parents, childcare can become quite a burden. With many day cares charging upwards of $1,000 per month per child, it’s important to take advantage of the tax breaks to help offset these costs. The Child and Dependent Care Credit is worth between 20% and 35% of child care costs up to $6,000 for two or more children. Tax-advantaged accounts through workplaces can increase this benefit by as much as $1,000 in additional expenses.

Investment Taxes

Many mutual funds automatically reinvest dividends on behalf of an investor, but few remember to increase the cost basis of the fund. By reducing the cost basis, investors reduce taxable gains or increase tax-saving loss when shares are redeemed. A failure to recalculate the cost basis results in double-taxation where an investor is taxed once in the year it’s paid out and again when they’re included in the final sales in retirement.

Investors that have purchased a taxable bond for more than face value may be eligible for a tax break since the IRS taxes the extra interest that the bond produces. On one hand, an investor can amortize premium over the life of the bond and reduce the tax basis over time. On the other hand, they can include the full premium in your tax basis when the bond is sold in order to increase the taxable loss dollar for dollar to reduce the taxable gain.

The Bottom Line

Taxes can be complicated—even for accountants. In order to pay as little as possible, it’s important to learn yourself about all of the different credits and deductions available, including the little-used ones listed above. (For more, see: 10 Most Overlooked Tax Deductions.)

More Tax Deductions at Investopedia.


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