A tax deduction reduces your taxable income by the amount of the deduction. So if you receive a $5,000 deduction, then your taxable income is reduced by $5,000. The tax savings is the product of the deduction and your marginal tax rate, so if your tax rate would have been 25%, then you save $1,250 in taxes with a $5,000 deduction. Some deductions are common and any preparer or tax software will remind you to claim them. But others might involve some thinking on your part. Here are some of the most overlooked tax deductions.
Student Loan Interest Paid by Parents
You can typically only deduct mortgage and student loan interest your are obligated to pay. However, if your parents pay interest on a student loan that’s in your name, you will be able to claim the deduction for the interest paid, assuming you’re not being claimed as a dependent. The payment is treated as if your parents gifted you the money, and then you used that money to pay your student loan interest.
Moving Expenses for a New Job or First Job
If you took a new or first job during the year, and your new job was more than 50 miles from your previous residence, you can take a deduction for the expenses related to your move. This includes the cost of getting yourself and your possessions to the new home. You can even deduct the mileage it takes to get there. For more information, refer to Pub 521.
State Sales Tax
Each taxpayer can choose between deducting either state and local income tax or state and local sales tax paid. For most people, it’s going to make sense to deduct their state and local income taxes. But for those who live in states with no income tax, it will make sense to deduct the sales tax paid throughout the year. The IRS allows you to use a table to estimate this deduction. But if you purchased big ticket items such as a vehicle or boat, don’t forget to include this amount as a separate entry.
Child Care Credit
Although it’s not a deduction, the child care credit is even better! That’s because a credit is a dollar-for-dollar decrease in your tax bill. The costs of daycare, preschool, babysitters, or even summer camps can qualify. Families earning more than $43k get a credit for 20% of their eligible costs (up to $3k for one child, and $6k for two).
If you think that any of these apply to you, make sure to visit that section of your preferred tax software if you’re doing your own taxes, or discuss them with your tax professional. In 2002, the Government Accountability Office performed a study and estimated that Americans overpaid their taxes by $945 million. But don’t scare this into going out and hiring a tax professional. The GOA also determined that 49% of the tax returns where people overpaid had been prepared by a third party.
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