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Best Tax Deductions: Commonly Overlooked Opportunities

Nov 24, 2020 3 min read David Rodeck

Key takeaways

  • Overlooking deductions can cause you to overpay your taxes.
  • Congress recently revamped several key tax breaks.
  • Pay attention to child care expenses, medical bills, state sales taxes and student loan interest.

 

 

The U.S. tax code is full of potential deductions, but it's up to you to identify what you can claim. This year could require some extra preparation as the federal government changed several tax laws in response to COVID-19.

Here are some of the best tax deductions that are often overlooked, as well as what it takes to qualify for each.

 

 

Federal itemizing and the new standard deduction

When you file your federal tax return, you can either claim the standard deduction or itemize deductions individually.

The Tax Cuts and Jobs Act of 2017 (TCJA) increased the size of the standard deduction—but removed some things that used to qualify for itemization. The 2020 standard deduction Opens in new window is $12,400 for single filers and $24,800 for married couples who file jointly. It's only worth itemizing if all your deductions top the standard amount.

 

Charitable deductions

Money you donate to charities or nonprofits (but not political campaigns) is deductible.

You can also write off the "fair market value" of donated goods like food and clothing. If you volunteer, you can deduct the costs of getting to the charity (like gas or bus fare) but not the value of your time.

Normally, you can only deduct charitable donations if you itemize. But for 2020, you can deduct up to $300 in cash donations Opens in new window even if you claim the standard deduction.

 

Medical expenses

If you itemize, you may be able to deduct significant out-of-pocket health care costs due to the pandemic or otherwise. At the federal level, you can deduct medical expenses Opens in new window that exceed 7.5% of your adjusted gross income (AGI). For example, if your AGI is $100,000 and you had $12,000 in medical bills, you can deduct $4,500.

Note that if you're self-employed, you can deduct your health insurance premium payments.

Also, your state may let you deduct medical expenses at a lower threshold than you'd need to meet on your federal 1040.

 

Work tax deductions

One tax break the TCJA removed was for unreimbursed work expenses Opens in new window like office supplies. However, there are still a couple work-related deductions to consider.

If you were hired for your first job and had to move at least 50 miles for it, you can deduct your moving expenses Opens in new window.

Another overlooked deduction applies to jury duty: If your employer kept paying your salary and asks you to forward your jury duty pay to them, you can deduct that amount Opens in new window.

 

Credit for child care expenses

Through the Child and Dependent Care tax credit Opens in new window, you can claim the cost of child care like a nanny or day care. This is easy to overlook if you pay those costs with a work account like a dependent care FSA (which is already tax free), but you can claim the credit for expenses the FSA doesn't cover.

Note that unlike a deduction, which lowers your taxable income, a credit comes off your tax bill dollar for dollar. For example, if you spent $7,000 on child care and used $5,000 from your FSA, you can claim a $2,000 credit for the difference.

 

Home office deduction

If you started working at home due to COVID-19, you may have had to set up a new home office. Unfortunately, the TCJA removed the home office deduction for W-2 employees. But if you're self-employed, you could still be eligible.

To qualify, your office space must be 1) used primarily for work, and 2) the main location of doing business. Detached structures like garages or sheds also qualify. Your deduction depends on the size of the workspace relative to your total property—if the office represents 15% of your square footage, you can deduct 15% of your mortgage or rent.

 

Earned Income Tax Credit

Aimed at families with lower incomes, the Earned Income Tax Credit Opens in new window (EITC) is a straight dollar reduction of taxes owed. The amount of the credit depends on how many children you have. It's also refundable, so if it's more than what you owe in taxes, the IRS refunds you the difference.

Eligibility depends on your income and household size. For the 2020 tax year, if you're single without kids, you qualify if your income is $15,820 or less; for married couples with children, the maximum joint income is $56,844.

 

Military deductions and credits

Military service members Opens in new window can deduct moving expenses, whether for their first jobs or not. They can also deduct the cost of buying and maintaining their uniforms. And while combat pay is nontaxable, it can still qualify for the EITC, potentially earning a larger credit.

 

State sales tax

The IRS lets you deduct what you pay in either state income or sales taxes. This flexibility makes this a great tax deduction, especially if you live in a state that doesn't charge income tax, such as Florida.

The IRS helps you calculate Opens in new window how much sales tax you paid during the year, based on where you live and your purchases. This way, you can compare whether you'd get a bigger break from sales or income tax.

 

Student loan interest and payments

If you're paying down student debt, you can deduct up to $2,500 a year in interest from your taxes—even if someone else makes the loan payments for you. (To qualify, the others paying your loans must do so voluntarily; they can't be cosigners legally required to make payments.)

For 2020, there's another tax break if your employer helps pay off your student loans. These payments normally count as taxable income, but from March 27, 2020, to December 31, 2020, you can receive up to $5,250 from your employer and exclude it from your taxable income.

 

 

What you can do next

Revisit your tax plan as soon as possible to prepare for changes and new rules on deductions and credits. Consider meeting with a tax advisor for more help finding overlooked tax deductions.

Prudential does not provide tax or legal advice. Please consult your tax and legal advisors regarding your particular circumstances.

Footnotes

David Rodeck is a freelance writer specializing in insurance, investing, and retirement planning.

 

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