Unlocking Hidden IRS Deductions: The Tax Breaks Many Overlook

Tax season can be an intimidating time, but understanding the deductions available to you can make a world of difference. Many people leave valuable money on the table simply because they are unaware of some of the deductions they qualify for. In this article, we’ll cover some of the lesser-known IRS deductions that could put more cash in your pocket and ease your tax burden.

1. Out-of-Pocket Charitable Expenses

Most people are aware they can deduct charitable donations, but not everyone knows that out-of-pocket expenses incurred while volunteering for a charity can also be deducted. If you buy supplies for a charity event, drive your own car to help deliver goods, or spend money on uniforms specifically required for your volunteering work, you can often deduct these costs. Even the mileage you accumulate while driving for charity can qualify for a deduction (currently at 14 cents per mile).

2. Student Loan Interest Paid by Parents

If your parents are paying your student loans, there’s a tax benefit that may surprise you. The IRS allows the individual responsible for paying the student loan to deduct up to $2,500 in interest paid on their taxes, even if the money was paid by someone else. If you’re no longer a dependent and your parents paid off the interest, the IRS treats it as if they gifted you the money. This means you can take the deduction on your taxes if you meet income requirements.

3. State Sales Tax

Did you know that you can choose between deducting state and local income taxes or state sales taxes on your federal tax return? This can be especially beneficial for those living in states without income taxes or for individuals who made a significant purchase like a car, boat, or major appliance. By keeping track of your receipts or using the IRS tables based on income and local rates, you could add a substantial deduction.

4. Gambling Losses

Whether you’re a casual gambler or an avid poker player, your losses at the casino, racetrack, or even online betting sites may be deductible. Gambling losses can be deducted up to the amount of your winnings if you itemize your deductions. However, you need to keep meticulous records of your wins and losses, including tickets, receipts, and documentation of the events where the gambling took place.

5. Health Insurance Premiums for Self-Employed Individuals

If you’re self-employed and pay for your own health insurance, you may be able to deduct the entire cost of your premiums for yourself, your spouse, and your dependents. This deduction applies regardless of whether you itemize your deductions, which can make a significant difference for freelancers, small business owners, and gig workers. Keep in mind, though, that if you’re eligible for any employer-subsidized health plan, even through your spouse, you can’t take this deduction.

6. Mortgage Points

If you bought a home this past year, the mortgage points you paid to lower your interest rate may be deductible. Mortgage points are essentially prepaid interest, and they’re often deductible in the year they’re paid. If you refinanced your mortgage, the points may also be deductible but must typically be spread out over the life of the loan. This deduction can save a significant amount of money for new homeowners, making it a valuable benefit for many.

7. Medical Expenses for Dependents Not Living with You

If you’re paying medical expenses for a dependent who doesn’t live with you, you might still be able to take a deduction. The IRS allows you to deduct qualifying medical expenses exceeding 7.5% of your adjusted gross income, even if the person you’re paying for isn’t in your household, as long as they qualify as your dependent.

8. Moving Expenses for Active-Duty Military Members

The Tax Cuts and Jobs Act of 2017 eliminated moving expenses for most taxpayers, but there’s an exception for active-duty military personnel. If you’re in the military and need to move due to a permanent change of station, you can still deduct the costs associated with your move, including the cost of transporting household goods and personal effects.

9. Educator Expenses Beyond the Usual

Teachers can deduct up to $300 (or $600 if married filing jointly and both are educators) for classroom supplies. However, many educators are unaware that this deduction can include more than the typical classroom materials. It can also cover professional development courses that teachers take to stay current in their field. It might not seem like much, but every dollar counts, and educators should take advantage of it if they’re eligible.

10. Child and Dependent Care Credit for Day Camps

Working parents are often aware of the Child and Dependent Care Credit, but what some might miss is that the cost of sending a child to a day camp during the summer is often eligible for this credit. This is particularly valuable for parents who work full time and need childcare during the summer months. However, overnight camps do not qualify, so it’s important to differentiate between the two.

11. Job-Hunting Expenses

Looking for a new job? Certain job-hunting expenses can be deductible, even if you didn’t end up getting the job. This can include things like travel expenses for interviews, resume printing costs, and agency fees. One catch is that the job must be in the same field you previously worked in, and this deduction can only be taken if you itemize. However, these costs can add up, making it a deduction worth considering.

12. Tax Preparation Fees

You can deduct tax preparation fees if you itemize deductions, though this one has a catch. The Tax Cuts and Jobs Act of 2017 eliminated the deduction for tax preparation fees for most individuals, but if you are self-employed, part of the fee may still be deducted on your Schedule C. It’s a small deduction but worth noting for those running their own business.

13. Home Office Deductions for Employees (If Unreimbursed)

The home office deduction isn’t only for self-employed workers. Employees who aren’t reimbursed by their employer for home office costs may be eligible for a deduction, though the Tax Cuts and Jobs Act of 2017 restricted this significantly. However, if you’re still able to claim miscellaneous itemized deductions, this could include unreimbursed employee expenses like a home office.

14. Energy-Efficient Home Improvements

Did you make your home more energy efficient this year? Installing items like solar panels, energy-efficient windows, doors, or HVAC systems could qualify for a tax credit under the Residential Energy Efficient Property Credit. These credits can cover up to 30% of the cost of certain improvements, which can lead to a substantial reduction in your tax bill. Be sure to keep receipts and manufacturer certifications handy.

15. State Income Tax Refund

If you received a state income tax refund last year, you may need to report it as income on your federal tax return. However, if you didn’t itemize deductions in the previous year, the state refund is often not taxable.People often overlook this nuance, leading to unnecessary taxes owed.

Final Thoughts

Navigating the world of IRS deductions can be complex, but understanding the lesser-known deductions can significantly reduce your tax liability. Whether you’re a teacher, a freelancer, a homeowner, or a caregiver, knowing what you can deduct helps you keep more of your hard-earned money. To ensure you’re not missing any potential deductions, consider keeping detailed records and consulting a tax professional who can guide you through your unique tax situation.

Remember, tax laws can change frequently, so staying updated is key to making sure you don’t overlook valuable tax breaks. These hidden deductions might just make a surprising difference in the amount of your refund—or reduce the amount you owe.

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