Many people don’t realize it, but one of the most effective ways of ensuring you get the biggest possible tax refund is claiming all deductions and credits you qualify for.
As a young adult, it's so tempting to just add your W2 information into TaxAct or Turbo Tax and call it a day. But you'd probably be pretty upset if you learned just how much money you throw away every year by just doing the bare minimum.
Most people are aware of the more common and obvious benefits you can claim on your taxes like having a child or buying a house. However, there are other ways to save than just those two.
There are too many of them to list, in fact, but there are lots of both automated and manual ways of checking all the deductions and credits you qualify for. Most tax software these days will help you out, and if you use a service like H&R Block, your rep will help you out as well.
But the best solution is to educate yourself first.
Deductions from your taxes come from different sources—some unexpected like donations to nonprofit organizations or self-employment. Whenever you’re dealing with such sources, it’s an important part of money management to remember them when filing your taxes.
If you're tired of missing out on money on your tax returns, here are some of the most commonly overlooked tax deductions for family, business and home transactions.
1. Personal property taxes
Personal property taxes are those imposed by a local authority or the state on the value of your personal property. The most common example of personal property tax is the amount that’s usually imposed on the value of a car, because it’s assessed as a part of annual registration fee.
According to the tax code, property tax is an ad valorem tax (meaning it’s imposed proportional to the value of your property) imposed annually on personal property.
Essentially, if you happened to buy any property over the year, say a car, house or boat, you may not have realized a percentage of the cost went to taxes. That is, except for those who receive a personal tax bill for such purchases.
Taxes account for quite a bit of the cost of property, but the good news is that taxes related to personal property may be tax deductible.
2. Medical expenses
Medical expenses can eat up quite a chunk of your budget, especially if they catch you off-guard thanks to unforeseen emergencies. If you’re covered by your insurer, then you’re in a better position. However, the rest are left with a veil of uncertainty over them.
There’s a silver lining on top of all of this, too, though. The IRS allows some relief on taxpayers by making some of these expenses partly deductible.
The IRS allows citizens to deduct medical expenses exceeding 7.5% of their adjusted annual gross income.
For example, say you have a modified adjusted gross income of $50,000 and $7,000 in medical expenses.
You would multiply $50,000 by 0.075 (7.5%) to find that only medical expenses adding up to over $3,750 can be deducted. In the end, you should be left with $3,250 ($7,000-$3750) worth of medical expenses to deduct.
These cuts are deductible on preventive care, surgeries, treatment and dental and vision care. Visits to the psychiatrist, psychologist and costs on medication appliances and drugs are also tax deductible.
3. Charitable contributions
Giving to charity is always a good idea. You're helping someone in need, and giving back to your community. But did you know certain charitable contributions are also tax deductible?
One important detail to remember is to always itemize the deductions on your tax returns. Additionally, only donations to qualified charitable organizations are deductible. For that reason, if you’re after a tax deduction at the end of the day, ask for the organization’s determination letter from the IRS.
4. Moving expenses
Federal tax laws allow you to deduct moving expenses off your tax returns if you are relocating for a new job or a transfer during your current job by the employer. However, not every move justifies a tax deduction.
There are a few stipulations to be met. Most importantly, the distance and time test requirements should be sufficiently considered.
The distance test requirement states that the distance between your new and former home must be at least 50 miles farther than the previous employer and from it.
For instance, if you used to commute 6 miles to work, your new home must be at least 56 miles away.
The time test requirement states that you must work for at least 39 weeks for the new employer starting the day you arrived. The days do not have to be consecutive and the employer shouldn’t necessarily be the same person.
5. Refinancing rental property
On your primary residence, you can usually deduct qualified points and interest. Points is prepaid interest usually paid to the lender in order to obtain a loan such as a mortgage.
On the other hand, you can deduct all costs that are associated with acquiring a new mortgage for a property that’s rented out to you.
Some loan-related expenses that can be deducted include: mortgage insurance premiums, credit report fees and application fees. Since the cost is usually spread out over the lifetime of the loan.
For that reason, if it cost you $4,000 to refinance your forty year mortgage, you can deduct $100 every year until the loan is paid in full.
Remember, though, that there are other expenses not directly related to the loan that are also deductible. For instance, operating costs.
6. Theft and casualty loss deductions
The IRS defines a casualty as any kind of damage, property loss or damage that results from an identifiable event such as sudden, unexpected or unusual events. However, you can only deduct casualties that are not reimbursed or otherwise reimbursable by an insurer.
With regards to theft, if you’re insured, you must file your claim or won’t be legible for deductions otherwise.
Events that qualify include unforeseen disasters such as car accidents, fires, floods and government-ordered demolitions and relocations.
Other kinds of losses, though unforeseen and cannot be reimbursed by an insurance company still do not qualify for casualty loss deductions.
For instance, if you’re involved in a car accident, but it’s found to be as a result of your willful negligence, the expenses you incur are not deductible. Additionally, accidents that occur as a result of slow deterioration also do not qualify for deductions.
As such if the house collapses but it’s been found to be as a result of slow deterioration of the building, it’s no longer tax-deductible.
7. Home office expenses
Year-on-year, technology just gets better and working at home becomes more and more feasible. This is further aided by the fact that rising transportation and living costs don’t make the situation any better.
There are lots of financial benefits for having a home office, but you will still incur considerable costs with regards to operating it. That’s one of the main reasons why home office expense tax deductions exist.
However, as with virtually all taxes, having a home office alone doesn’t qualify you for the tax benefits. There are a few criteria that have to be met.
For one, the home office must be used exclusively, such that it’s used as a primary place of business, where you meet customers and the like. Along the same lines, the area used as a home office must not be used for any other kinds of personal purposes.
This means that the area of your home used for business must be used in terms of legitimate business, and not merely for profit seeking.
Lastly, the deduction to be made is only limited to the income made from the activities undertaken in the home office. However, allowable deductions may still be carried forward to the future. Even then, it will still be subject to the same conditions and income limitations.
Stop missing out on tax deductions
Like we mentioned int he beginning, this is just a short list of the tax deductions you might be overlooking. There are plenty others.
If you use tax software like TaxAct and TurboTax, don't rush through all the prompts just to get it over with.
Answer all the questions because they may lead you to some hidden tax deductions you would've otherwise missed out on.