It is an unofficial American truth: no one enjoys filing their taxes. Arguably, the two moodiest days in America are 9/11 and Tax Day! Thank goodness for tax deductions; they are some of the efficient pain killers during the tax season.
There are hordes of tax deductions. While the likes of income taxes and mortgage insurance are common, there are other incredible tax deductions you probably didn’t know of or were simply ignoring. Here are a few you don't want to miss.
Did you know about Out-of-Pocket Charitable Deductions?
You likely dole out charitable gifts throughout the year. What many don’t know is that you can write off out-of-pocket expenditures incurred in the course of charity. Let me make it easier for you. Let us say you bought a $60 ticket to a fundraising dinner in your church. If the cost of that dinner is $25, you qualify for a $35 ($60-$25) tax deduction.
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The same deduction applies if you volunteer as a nurse for your local charity but had to purchase a uniform. Now the amount you spent buying that volunteer nurse outfit and consequent expenses incurred in cleaning or maintaining that uniform (so long used in charitable activities) is tax-deductible. Nonetheless, documentation is a core part of out-of-pocket charitable deductions. Receipts will be required for such expenditures.
More importantly, in cases where your charitable contributions amount to (or exceed) $250, you will need the charity to acknowledge the support you rendered formally.
Have you been using state sales taxes?
This best suits you if you live in American states that don’t slap a state income tax on you. These nine states are Texas, Wyoming, New Hampshire, Florida, Washington, South Dakota, Wyoming, Alaska, and Nevada.
Typically, it is up to you to choose your deductions between local and state income taxes or local and state sales taxes. If you are in an American state that imposes taxes on your income, your best bet would be going for local and state income deductions. But for those in the said nine income-tax-free states, a sales tax write-off befits you. There are cases where filers in income-taxing states can still go with sales tax.
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A useful resource for determining your deduction per state is this IRS calculator. This calculator excels at computing the amount you can deduct in the state you reside in based on your income, state, and local sales tax rates.
So assuming you got bored of the road and bought an airplane, this IRS calculator will integrate the tax taken from you for that purchase when it calculates your overall sales tax deduction.
There is the option of reinvested dividends
Technically, reinvested dividends are not deductions. But this is one cool way to pay less tax. Most investors automatically put back their mutual fund dividends into purchasing more shares.
If you happen to be among this cluster, you must recognize that every share purchase raises your tax basis for that fund. The good side about this is the consequent reduction of your taxable capital gain (or at the other end raising you’re your tax-saving loss) upon share redemption.
Should you not itemize your reinvested dividends on your tax basis, you could be your dividends taxed twice. The first could be the regular taxation when dividends are paid out and reinvested at once, and the second taxation when such transaction is added to the sales proceeds. Not something to enjoy, right?
There is no issue requiring assistance from the mutual fund if you are uncertain about your tax basis. It is the norm for these funds to inform of the shares’ tax basis whose redemption was executed that year.
Were you ignoring deductions of Medicare premiums?
If you are self-employed with your business yet in operation after Medicare qualification, you can take off your premiums. These deductions specifically apply to premiums for Medicare Part D and Part B, in addition to expenses incurred for a Medicare Advantage plan.
It is not mandatory you itemize before enjoying this deduction. Also, these types of tax deductions are independent of the 7.5% of AGI test that is usually valid for itemized medical expenditures.
Take note that this deduction doesn’t apply for premiums disbursed for a period (say months) where you had eligibility for an employer-subsidized health plan. The said health plan could be provided by either your spouse’s employer (as typical of jobs that provide family medical coverage) or your very employer (for cases where you run your enterprise along with a paid job).
Bet you have not heard of the American Opportunity Credit
It would be unfair if we don’t tell you about the American Opportunity Credit, especially for those making significant payments for college tuition.
This tax break bases on 100% of the initial $2k disbursed for college qualification and 25% of the following $2k, running into a maximum annual credit of $2,500 for each student.
Individuals with an $80k adjusted gross income at most and $180k maximum for wedded couples qualify for the full credit. Should your income beat these margins, you would get your tax credit in batches. It is worth adding here that in instances where your tax liability is less than your tax credit, a refund is triggered.
So tell me, aren’t these smart ways to lower your taxes? Now your heart doesn’t need to skip like Hijiki Ikuyama (world record owner for skipping) when you hear about the IRS.
