8 Overlooked Tax Deductions You Need to Know Before You File Your Taxes
Tax Day is May 17th, which means it's time to start organizing your papers.
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For most of us, tax season is full of question marks and absolute dread. It can be overwhelming because you have to find every receipt and W2, connect with a tax expert if you have any questions, and remember what kind of tax deductions you qualify for. Does this sound like a fun way to spend your day off? Not really.
The good news is, filing your taxes can sometimes mean you're getting money in return when you have enough tax deductions under your belt—and the even better news is you may be qualified for more tax deductions than you realize, especially after a year like 2020 when the government has implemented so many changes to our finances and taxes. So if you're curious about the kind of tax deductions you should check off your list, here are eight you may not have heard of and even qualify for.
1. Home office tax deduction
While 2020 was the year of making your WFH office, 2021 can be the year it helps your finances. Things like desks, chairs, printers, upgrading high-speed Wi-Fi for video meetings, and electric bills can't be added due to The Tax Cuts and Jobs Act, as the act eliminated the home office tax deduction for tax years 2018 to 2025; however, there's a loophole.
Jean Wells, J.D., CPA, and associate professor of Accounting at Howard University, gave a few tips on how to make the best of it by saying, "Employees should seek reimbursement from their employers or have their employers purchase these items and deliver to the employees."
As for independent contractors and self-employed workers, Wells says, "They can also deduct home office expenses, including expenses to retrofit and furnish the office space…and can write it off simply. The calculation is the number of square feet used for the home office times $5/square foot for a maximum of 300 square feet and $1,500."
2. Tax deductions for homeowners
So there's a lot you can do if you're a landlord or homeowner. Chances are, you may not be utilizing the most for figuring out your taxes. Moswen James, EA for Get Help Tax and Bookkeeping, discussed a tax deduction if you sold your home. "If you own real estate and sell it for a profit, you can exclude up to $500,000 of the gain from federal income tax so long as the home is your primary residence for two of the last five years. For those that do not file married, filing jointly the exclusion is limited to $250,000," he says.
3. Passive loss carryover tax deduction
Summed up, it's when you have more expenses than income from different activities (like rental properties) that you didn't use the following year. "They accumulate and can only offset again in later years when you sell the investment property. It's amazing how many landlords forget to take the deduction when they sell," says Domenick Tiziano, creator of Accidental Rental.
4. Retirement savings contribution credit
A commonly overlooked tax deduction is the Retirement Savings Contribution Credit, which can get you up to $1,000 in nonrefundable credit (or $2,000 for joint filers). However, there are a few things to keep in mind regarding your eligibility. You're eligible if you're over 18, not claimed as a dependant, and not a student.
Brian Martucci, a tax expert for Money Crasher, went into more detail on some hurdles. "You can take this credit on eligible contributions to your IRA, 401(k), and certain other eligible retirement accounts... The big hurdle is the income restriction, as the credit phases out above $65,000 AGI for married joint filers. But if you qualify, it's valuable."
5. State and local tax deductions
Like almost everything in the United States, you have to look into your own state's specifications. And taxes are no different. Shelli Woodward, a financial controller of MerchantMaverick.com, says, "Many states offer deductions above and beyond the federal deductions. You will need to research your state or speak to a professional who is familiar with your state."
- In Idaho, there is a capital gains deduction that allows a deduction of up to 60% of the capital gain net income from the sale or exchange of qualifying Idaho property.
- In Oregon, there's a designated first-time homebuyer savings account that you can subtract from your income for Oregon tax purposes.
- In Minnesota, they have two tax relief programs for families with children: the K-12 Education Subtraction and the K-12 Education Credit.
6. Babysitter tax deduction
Just when you thought babysitters couldn't be even more of a godsend, they can help with your taxes. If you paid for a babysitter or a summer camp within the past year, you can claim a tax credit for up to $3,000 for one dependant. Attorney Lyle Solomon says, "If you hire a babysitter to monitor your children as you sleep, hunt for work, or are a full-time student, you may subtract the expense of the babysitter. The name and tax ID number of the individual or agency that delivered the treatment, as well as the address where the care was provided, must be recorded. Some states often ask you to disclose the care provider's phone number, too.
Although this is not legally a deduction, it is a safer choice, so you may not have to itemize the expenses to apply for the credit. This suggests that, in addition to accepting the statutory deduction rather than itemizing, it will help you save money on taxes."
7. Medical expense deduction
The Medical Expense Deduction is a little-known tax dedication that can apply to a lot of people. The deduction can let you deduct the portion of your un-reimbursed medical (or dental) expenses that exceed 7.5% of your adjusted gross income. So if you had a big procedure the past year, it's time to look into it.
Nerd Wallet's tax specialist Tina Orem breaks it down: "For example, if your adjusted gross income is $100,000 and you had $10,000 of un-reimbursed medical expenses for medical or dental care for yourself, your spouse, or your dependents in 2020, you might be able to get a $2,500 tax deduction. You'll need to itemize your taxes to take this deduction, though."
8. Educator expense deduction
Calling all elementary and secondary education educators. There's a little-known tax deduction you may not be aware of: the educator expense deduction. It can help you deduct up to $250 for unreimbursed out-of-pocket expenses. Michael Benninger, Banking Writer for Finder, says there are a few ways you can qualify. "You must have worked at least 900 hours during the school year for an institution specializing in elementary or secondary education," Benninger says. "Eligible expenses include books, supplies, software, and professional development courses. And if you're also married to an educator, you could deduct up to $500 in expenses if you file jointly."