As the year comes to a close, many individuals and businesses start preparing for the tax season. One of the key aspects of this preparation involves seeking out every possible avenue for deductions. While many are aware of the common tax deductions such as mortgage interest and charitable donations, there are several others that are often overlooked. This article will explore five of the most frequently missed tax deductions.
State Sales and Income Taxes
The IRS allows taxpayers to deduct either their state income tax or state sales tax, but not both. For those living in states with no income tax, the sales tax deduction is a valuable option. However, even those who do pay state income taxes might find that the sales tax deduction is more beneficial, especially if they've made substantial purchases throughout the year. It's a deduction that's easily missed, but potentially worthwhile.
Reinvested Dividends
This isn't technically a deduction, but it can save you a significant amount in taxes. When your mutual fund automatically reinvests your dividends in extra shares, those shares increase your tax basis in the fund. This reduces the taxable capital gain (or increases the tax-saving loss) when you redeem shares. Since the IRS doesn't track this for you, it's easy to overlook.
Out-of-Pocket Charitable Contributions
Small charitable contributions can add up. If you've baked goods for a nonprofit fundraiser, bought supplies for a school event, or even driven your car for charity purposes, you can deduct these expenses. Make sure to get a written acknowledgment from the charity if the contribution totals more than $250.
Student Loan Interest Paid by Parents
If parents pay back a student loan incurred by their children, the IRS views this as if the money was given to the child, who then paid the debt. So a child who's not claimed as a dependent can qualify to deduct up to $2,500 of student loan interest paid by their parents.
Medical Expenses
Certain medical expenses that exceed 7.5% of your adjusted gross income can be deducted. This can include travel expenses to and from medical treatments, health insurance premiums paid from already-taxed income, and even alcohol or drug abuse treatments. These are easy to miss, but potentially significant.