The Focus - Our Tax E-Newsletter
Commonly Overlooked Tax Deductions
The busiest time of year for accountants is back, and often the same question is being posed to all tax professionals, “Am I missing out on any tax savings?”
The ultimate goal is to reduce taxable income, and maximize available credits. We’ve compiled this list of commonly overlooked ways to reduce your tax liability and keep more money in your pocket.
Minimize Capital Gains – Reinvested Dividends
It is important to maintain accurate records of your investment basis, for purposes of calculating taxable gains once the investment is sold. Often, dividends in stocks or mutual funds are reinvested year over year, which adds to the cost basis in the investment. In the year the investment is sold, the increased cost basis will decrease the capital gain (or increase the capital loss), helping to reduce taxable income.
Adjustments – Student Loan Interest
Previously, student loan interest paid could only be claimed by the person who was liable for the debt and paid the interest. However, a new exception allows student loan interest paid by others to be deducted by the taxpayer who is liable for the student loan. The amounts paid by someone else are considered a gift to the taxpayer with the student loan, and then considered to be paid by the taxpayer, making them eligible to claim any amounts reported on Form 1098-E. Please keep in mind, there are limitations for cash gifts to individuals that should be considered.
Adjustments – Moving Expenses
In 2018, the Tax Cuts and Jobs Act focused the moving expenses deduction solely to military personnel. An active duty military member who has been ordered to relocate should keep track of all expenses related to a permanent move; costs of moving your belongings, travel and lodging for the family are all eligible expenses. If these expenses are reimbursed by the government, the amount of reimbursement is not considered taxable income.
Adjustments – Jury Duty Pay, Paid to Employer
While not required, some employers will continue to pay an employee their normal pay while released from work for jury duty. In return, the employer may also ask that the jury duty pay received directly by the employee be paid back to the employer. The employee is still required to report the jury fees as taxable income, however can report the equal deduction of the amount paid back to the employer, so that there is no tax obligation related to the jury duty fees. The amount repaid to your employer should be reported on Schedule 1, Line 24a.
Itemized Deductions – State and Local Sales Tax
One of the primary itemized deductions most filers report is state and local taxes. It is important to determine which is more advantageous, income tax or sales tax paid to the state and local governments. For states with no income tax filings, the default would then be the sales tax paid. For residents of Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming, residents have a couple options for claiming sales tax deductions. The first and more tedious option, would be to keep track of all sales tax paid throughout the year. If that sounds like too much work, the IRS also has tables to help determine a general deduction amount. In addition, if there was any sales tax you paid on large purchases (home, vehicle, boat, etc), these may also be deductible. An important consideration when totaling state and local taxes paid is that the maximum allowed towards the itemized deduction is $10,000.
Itemized Deductions – State and Local Income Tax
For a majority of taxpayers, taking the income tax paid to state and local governments is more advantageous and more common than sales tax. Amounts withheld from common forms of income are an easy indication of taxes paid, however it can often be missed to include any amounts paid with a state tax filing if the individual owed come tax time. For example, if you owed a state tax liability in April 2022 when filing taxes for 2021, the amount paid in 2022 is considered taxes paid in 2022 and should be included on Schedule A. Keep in mind, the $10,000 limit for state and local taxes paid still applies.
Itemized Deductions – Charitable Contributions
Don’t forget to include all the small donations as well! While larger cash donations are often included, every bit counts. As long as the donation was to a qualified nonprofit organization, you can include costs you incur in your efforts to help the organization. For example, ingredients purchased that were used for a bake sale fundraiser can be considered a contribution. Miles driven for charity also gain a deduction of 14 cents per mile.
Itemized Deductions – Refinanced Mortgage Points
When a mortgage is originated, the points paid may be deducted at one time. For refinanced mortgages, points are deductible evenly over the life of the mortgage. For example, if the points on a refinanced 30-year mortgage was $1,000, the deduction amount each year would be $33 (1/30 * $1,000). While it might not make the biggest difference, every dollar counts.
Credits – Child and Dependent Care Credits
The American Rescue Plan, signed into law in 2021, brought significant changes to the structure of the Child and Dependent Care Credits only applicable to 2021. For childcare expenses incurred in 2021 but paid in 2022, the credit is up to 50% refundable, and the expense limit was increased to $8,000 for one dependent ($16,000 for two or more). The limits for expenses incurred and paid in 2022 is $3,000 for a single dependent, or $6,000 for two or more and the credit is up to 35% of expenses. It is also important to note the phase-out income limits for 2021 were increased significantly; if your 2021 AGI was $125,000 or less, you would qualify for the maximum 50% credit, up to AGI of $438,000 before there would be no credit allowed. For 2022, the credit is a maximum of 35% for an AGI of $15,000 or less, or a minimum of 20% for AGI in excess of $43,000.
Credits – Earned Income Tax Credit
The Earned Income Tax Credit (EITC) was designed to supplement wages for low income workers. It is estimated that 25% of eligible filers have not claimed the EITC they could have. The amount of the credit depends on income amounts, filing status, and number of dependents. If you qualify in a previous year that you did not claim the credit, you may file an amended return for up to three tax years to receive the credit.
If you have any questions about how these topics can affect your personal income tax situation, please do not hesitate to contact your tax advisor at Dermody, Burke & Brown.
The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.