Few realizations are more painful than realizing that you forgot to include a tax deduction that would have lowered your tax bill or increased your tax refund on your tax return. Here are some tax deductions that you shouldn't overlook.
The federal tax filing deadline for individuals has been extended to May 17, 2021. Quarterly estimated tax payments are still due on April 15, 2021. For additional questions and the latest information on the tax deadline change, visit our “IRS Announced Federal Tax Filing and Payment Deadline Extension” blog post.
For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.
1. Sales taxes
You have the option of deducting sales taxes or state income taxes off your federal income tax. In a state that doesn’t have its own income tax, this can be a big money saver. Even if you paid state taxes, the sales tax break might be a better deal if you made a big purchase like an engagement ring or a car. You have to itemize to take the deduction rather than take the standard deduction. TurboTax helps to determine whether itemizing or taking the standard deduction is best for you based on your entries and, if you itemize, whether you should take the sales tax deduction or deduct state income taxes.
2. Health insurance premiums
Medical expenses can blow any budget, and the IRS is sympathetic to the cost of insurance premiums—at least in some cases. Deductible medical expenses have to exceed 7.5% of your adjusted gross income (AGI) to be claimed as an itemized deduction for 2020. However, if you’re self-employed and responsible for your own health insurance coverage, you might be able to deduct 100% of your premium cost. That gets taken off your adjusted gross income rather than as an itemized deduction.
3. Tax savings for teacher
It’s the rare teacher who doesn’t have to reach into her own pocket every now and then to purchase items needed for the classroom. While it may sometimes seem like nobody appreciates that largesse, the IRS does. It allows qualified K-12 educators to deduct up to $250 for materials. That gets subtracted from your income, so you can take advantage of it even if you don’t itemize.
4. Charitable gifts
Most taxpayers know they can deduct money or goods given to charitable organizations—but are you making the most of this benefit? Out-of-pocket expenses for charitable work also qualify. For example, if you make cupcakes for a charity fundraiser, you can deduct the cost of the ingredients you used to bake them. It helps to save the receipts or itemize the costs in case of an audit.
5. Paying the babysitter
You might be able to deduct the cost of a babysitter if you’re paying her to watch the kids while you are working, looking for work, or a full-time student. You will need to report the name, and tax ID number of the person or organization providing the care as well as the address of where the care was provided. Some states also require that you report the telephone number of the care provider. While this is technically not a deduction, it can be even better because you don't have to itemize your deductions to receive the credit. This means that it can lower your tax in addition to taking the standard deduction rather than itemizing.
6. Lifetime learning
The tax code offers a number of deductions geared toward college students, but that doesn’t mean those who have already graduated don’t get a tax break as well. The Lifetime Learning credit can provide up to $2,000 per year, taking off 20% of the first $10,000 you spend for education after high school in an effort to increase your education. This phases out at higher income levels, but doesn’t discriminate based on age.
7. Unusual business expenses
If something is used to benefit your business and you can document the reasons for it, you generally can deduct it off your business income. A junkyard owner, for example, might be able to deduct the cost of cat food that encourages stray cats to hang around and keep the mice and rats away. A bodybuilder got approved to deduct the body oil he used in competition.
8. Looking for work
Losing your job can be traumatic, and the cost of finding a new one can be high. But, for tax years prior to 2018, if you’re looking for a job in the same field, you itemize your deductions, and these expenses exceed 2% of your adjusted gross income, any qualifying expenses over that threshold can be deducted. It may seem like a high bar, but those costs add up quickly—consider deducting the mileage you put on your car driving to interviews and the cost of printing resumes. Beginning in 2018, these expenses are no longer deductible for federal tax but some states, such as California, still allow this deduction after 2018.
9. Self-employed Social Security
The bad news about being self-employed: You have to pay 15.3% of your income for social security and medicare taxes, the portions ordinarily paid by both employee and employer. But there's one small consolation—you do get to deduct the 7.65% employer portion off your income taxes.