There’s one thing you should do before you file your tax return: Find overlooked tax deductions.
If you don’t, you could end up paying more on your taxes than you should – and missing out on keeping more of your hard earned money where it belongs – in your pocket. Keep in mind as you read this post that because everyone’s personal financial situation is unique, it’s best to consult your tax advisor about any questions or actions you are considering making before you do so.
In recent years, 45 million Americans claimed $1.2 trillion of itemized tax deductions. That number may seem too high to be increased any further but it still has room to grow if there are deductions that you qualify for but are overlooking, and as a result, missing out on. John Hughes, a private wealth advisor at Ameriprise, highlights some of the most commonly overlooked tax deductions as IRA contributions, tax credits, college saving, home improvements and job hunting costs. We expand on those overlooked deductions below.
- Tax-Deductible IRA contributions. Even if you’re covered by a plan at work, it may make sense for you to make IRA contributions so you can deduct them from your taxes. As Hughes notes, “It all depends on your income. If you qualify (for example, if you’re married filing jointly and have an adjusted gross income (AGI) of $98,000 or less), you can make a tax deductible contribution for 2016 of $5,500 (plus $1,000 if you’re over the age of 50) – up to the filing deadline of your return. Depending on your tax bracket, this action could potentially save you a few thousands of dollars.” That’s money that you otherwise would have been paying in taxes but can now set aside for your income needs during your retirement years.
- Tax credits. These are some of the best savings for taxes, as they are a dollar-for-dollar reduction of your taxable liability. Consider the child and dependent care tax credit (with a limit of $6,000 combined work-reimbursement accounts and personal spending) and the earned income tax credit, which 25 percent of eligible taxpayers don’t claim. If you’re among the one in four Americans who aren’t claiming the earned income tax credit but could be, this deduction could save you money come tax time.
- College. Hughes says another overlooked credit is for parents with children in college. If you don’t claim the child as a dependent, he or she can qualify for up to a $2,500 deduction for the interest you paid on the loan per student through the American Opportunity Credit. “The income limit includes an AGI of less than $160,000 in 2016 for married filing joint couples,” Hughes reports. “While there are qualifiers to obtain the credit, it’s clearly worth the look.”
- Home improvements. According to Hughes, “home improvements are not tax deductible in the year that they’re created, but can be added to the cost-basis of the home when you sell it. What is often deductible, based on your situation, is the interest paid on a Home Equity Line of Credit (HELOC) loan used for the renovations.” If situation applies to you, consider asking your tax accountant to run the numbers on the interest you paid on a HELOC and see if deducting that interest makes sense for your tax return.
- Job-hunting costs. Out of work and looking for a job? Keep track of those expenses. You can itemize out-of-pocket costs such as transportation, food and lodging, employment agency fees and printing costs (for resumes, postage, business cards, etc.). Just keep in mind that the total expenses can only be deducted if they are greater than two percent of your AGI.
There are also a few other unexpected deductions many Americans leave on the table. “The greatest opportunity for deductions is through your payroll,” Hughes reports. “While this generally has to be done proactively throughout the tax year, it has the biggest impact. Your 401(k) is clearly the biggest opportunity.”
Other ways to secure a deduction include claiming dependent-care expenses and Health Savings Accounts (HSA) contributions. “You can create an account to pay those bills on a pre-taxed basis through your payroll,” Hughes advises. “Now, you also have the ability to use the HSA which is a pretax contribution that goes into a separate account that can be used for current and future health expenses (not a use-it-or-lose-it proposition). This is new this year for high-deductible medical plans.”
Hughes also recommends getting yourself prepared to file your tax refund through careful record keeping all year long, so you can prove your spending when it’s time to file your return. “You should keep tax records for general expenses for a minimum of three years, and seven years for financial statements,” Hughes recommends. “Audits are always a concern, and maintaining tax records is your way of proving a deduction. There is no magic in how to keep records, electronically or on paper – whatever allows you to provide confirmation, if needed.”
It should be your goal to give the IRS as little of your money as possible. After all, you earned it and it belongs to you. If you qualify for these and other overlooked tax deductions like charitable donations, moving expenses, mortgage refinancing points and energy-efficiency home improvements, there’s no reason you shouldn’t talk to your professional tax advisor about claiming them.