Tax day is coming up fast, and you want to to take advantages of as many tax deductions as you can. You know the typical write-offs, but we found 28 tax deductions you didn’t know you could write off.
These are tax deductions that most people will be eligible for. If you have a business, you can check out the episode we did on LLCs and S Corps.
Before We Dive In
We are going to list a ton of ways to save money on your taxes but it’s important to understand just how much you can save.
For every $1,000 you deduct, you save your tax rate. If you’re taxed at 15%, you save $150 for every $1,000 you deduct.
If you’re taxed at 30%, you save $300 for every $1,000 you deduct. So this is not small change we’re talking about.
Andrew and Laura use deductions extensively and want all of us to do the same. But some of us will stand to benefit more than others.
If your household makes less than $80,000, you will see a significant impact if you take advantage of the incentives we outline.
None of us likes paying taxes, and everyone agrees that the tax code is too complicated.
But as Tom Wheelwright explains in his book Tax-Free Wealth, taxes are not meant as a show of our civic commitment but as a series of incentives set by the government to encourage citizens to do things that grow the economy.
Collecting more taxes than necessary is legalized robbery.Tweet This
And if you look at things that are deductions, buying a home, having a kid, and starting a business, you can see what the government wants us to do to bolster the economy.
Don’t Be Lazy
The lazy way of filing taxes is to use standard deductions. This is what 2/3 of filers do. For 2017, that amount is $6,350 for single filers and $12,700 for married couples who file jointly.
You may be able to deduct more than those amounts by taking itemized deductions. All you need to do is figure out if by doing so, your deductions would be higher than $6,350 or $12,700.
A Good Problem To Have
Many tax deductions have a phase-out meaning if you make over $X they become less impactful, and when you make over $X they can’t be used any longer.
An excellent example of a phase-out tax deduction is passive income generated by rental properties.
They phase out to 50% less impactful for a married couple who make more than $100,000 and phase out entirely after earning $150,000.
Must Use Deductions
These are deductions everyone eligible must take advantage of.
1. Standard Tax Deduction
If you did the math and didn’t have enough itemized deductions to get you above $6,350 for singles and $12,700 for marrieds, you can take the standard tax deduction. If you are filing as head of household, you can deduct $9,350.
2. Reinvested Dividends
Do you have a Betterment account? Do you sometimes get a notice that they have reinvested dividends for you?
Each of those reinvestments increases your tax basis in the fund. That lowers your amount of taxable capital gains when you eventually sell your shares.
When you finally do sell, don’t neglect to include the reinvested dividends in your cost basis, which you subtract from the gains from the sale to determine your gain, you are overpaying your taxes.
3. Child Care Credit
When you use childcare while at work (not for date night, sorry!) you can take a tax deduction between 20-35% of those costs.
If your company allows you to use pre-tax money for child care costs, that may be a better option than taking the deduction though. Suppose you are eligible for a 20% credit but are taxed at 25%.
In that case, the credit would be the better choice.
If you use a reimbursement account, you can avoid federal income tax and the 7.65% Social Security tax. No double-dipping though.
Expenses paid with pre-tax money can’t be used to take advantage of the tax credit. However, the pre-tax amount you can use is just $5,000.
The tax credit is up to $6,000 for two children, or more so you can claim that additional $1,000 and doing so will cut $200 or more from your tax bill.
4. Parents as Dependents
If you care for aging family members like parents, grandparents, aunts, and uncles, etc., those people may qualify as dependents, even if they don’t live with you.
To claim these family members as dependents, you and they must meet specific criteria like income requirements.
The dependent person can’t have an income over $4,050. You can see all the requirements here.
5. Medical and Dental Expenses
If you, a spouse, or your dependents had medical or dental expenses that exceeded 10% of your adjusted gross income, you can deduct them.
If you or your spouse are older than 65, you can deduct those expenses if they exceed 7.5% of your adjusted gross income.
Eligible expenses include some types of preventative care, surgery, medical and dental visits, mental health visits, prescribed medications, contact lenses and glasses, and travel costs associated with medical or dental care.
Things not eligible for this deduction include cosmetic procedures, dietary supplements (boo!), and gym memberships (boo!).
If you do not have insurance through an employer, as in the case of freelancers, you can deduct your health care premiums if they exceed 7.5% of your gross adjusted income.
6. HSA Contributions
If you have a high deductible health insurance plan and use a Health Savings Account, you can claim a tax deduction on contributions you made to the account.
You cannot claim any contributions your employer makes.
HSA’s are a great tax shelter. We covered this more in-depth in our Back Door Roth episode.
Lively is the #1 user-rated HSA provider. It carries no fees or minimums for individuals and families. Save your money in an interest-bearing account or invest the funds. Use yours for qualified medical expenses. HSAs are the ultimate tax-advantaged account; contributions are tax-deductible while earned interest and withdrawals are tax-free.
7. IRA Contributions
You cannot deduct Roth contributions, but you may be able to deduct Traditional IRA contributions provided that neither you nor your spouse has an employer-based retirement account. You can deduct up to the entire amount of the allowed contribution which for 2017 is $5,500 or $6,500 if you are over age 50.
8. State Taxes
If you owed money when you filed your state tax return for 2015 and paid them in the spring of 2016, be sure to deduct them on your 2016 federal return.
Lesser Known Deductions
Okay, we covered the tax deductions many people are familiar with. Now let’s include some lesser-known deductions.
9. Student Loan Interest
Paid by your parents. If your parents paid your student loan debt, the IRS treats that money as a gift to you that you then used to pay that loan.
As long as your parents are not claiming you, you can qualify to deduct up to $2,500 of student loan interest that they paid.
10. Student Loan Interest Part II
You can deduct some or all of eligible student loan interest. The amount you can deduct is $2,500 or the amount you paid, whichever is less.
This deduction cannot be claimed if you are married but don’t file jointly or if you or your spouse are claimed as a dependent on someone else’s return.
11. American Opportunity Credit
This credit applies to four years of college. The maximum allowed credit is $2,500, 100% for the first $2,000 of eligible college expenses and 25% on the next $2,000.
The entire $2,500 credit is available to those whose modified adjusted gross income is less than $80,000 for singles and $160,000 for marrieds. If you make over those amounts, this is a phase-out.
12. Further Education
College isn’t just for the youngsters, and neither are education-based tax deductions. The Lifetime Learning credit can be claimed for yourself or your spouse and for more than four years.
The credit is worth up to $2,000 per year and can be claimed for education expenses that lead to new or improved skills.
So if you were considering taking some classes to improve your side hustle, or land a better paying job, here is some incentive!
This credit phases out between $55,000-$65,000 for singles and $110,000-$130,000 for marrieds.
You can deduct up to $4,000 of eligible higher education expenses for yourself, spouse, or a dependent. If you are married but don’t file jointly or if you are claimed on someone else’s return, you can’t qualify for this one.
14. Saving for College
Contributions to a 529 College Savings Plan is not deductible on federal taxes, but several states do allow you to deduct them.
15. First Job Moving Expenses
Head’s up all you recent college grads! If you moved more than 50 miles to take your first job, you can deduct the cost to get you and your stuff to your new location.
The write-offs include 16.5 cents per mile for driving your own car and any parking fees or tolls. You can take this write off even when you don’t itemize.
16. Job Search Expenses
Searching for a job sucks so take some comfort in the fact that you might be able to write off some of the expense.
The job search must be in the same line of work as your current or most recent job, and you can deduct things like transportation, preparing, printing, and mailing your resume, and employment agency fee.
17. Mortgage Points
Mortgage points are a fee you pay the bank when you close in order to get a lower interest rate. If you purchased these points and you itemize, you can deduct the cost of the points in addition to mortgage interest.
18. Home Sale
If you made money selling your home, you can exclude up to $250,000 in gains from your income for singles and $500,000 for marrieds.
19. Save Your Raise
Rather than pocketing a raise, increase your 401k contribution. If it’s a plan funded with pretax money, you can lower your tax bill for 2017. The maximum contribution for 2017 is $18,000 and $24,000 if you are over age 50.
20. Tax Loss Harvesting
Tax loss harvesting means you sell an investment that has lost money. When you “harvest” that loss, you can offset taxes on income and gains.
Betterment does this for you automatically.
21. Investment Fees and Expenses
Now, we just did an entire episode last week on avoiding investment fees and expenses, so this shouldn’t be much of a write off for any of you!
Never the less, you can write off things like investment counseling fees, custodial fees, your safety deposit box, transportation fees to and from an appointment at your financial advisor’s office, attorney’s fees paid to collect taxable income, and the cost to replace lost security certificates.
But seriously, don’t pay fees.
22. Casualty, Disaster, and Theft Losses
If you had household items lost to any of the above, you can deduct their value.
23. Military Reservist Travel Expenses
If you’re a member of the reserves and travel more than 100 miles from your home for duty, you can deduct eligible transportation, meals, and lodging expenses.
24. Work Uniforms
If your job requires specific clothing that isn’t considered everyday wear, you can deduct their cost. Deductible items include things like theater costumes, military uniforms, and protective clothing.
25. Home Office
If you use your home as a primary location for your trade or business, your primary location for meeting patients or clients, as the storage place for inventory or product samples, rental use, or a daycare facility, you can write off part of your home expenses.
26. Car Travel for Business
If you use your car for your job or business, you may be able to deduct costs. You can use a standard mileage rate or the actual expense method which is the real cost to use the car for business.
If you travel for work, you can deduct certain expenses that your employer does not reimburse like transportation, luggage fees, meals, laundry, lodging, and business calls.
27. Charitable Donations
You can deduct cash donations to IRS approved charities for up to 50% of your adjusted gross income. Be sure to have a written record like a bank statement or a receipt from the charity.
Non-cash donations are also deductible. The can be written off for fair market value, the amount you could have sold the items for. If you donate your car, be sure it’s to a qualified charity like a 501(c)(3).
28. Earned Income Tax Credit
The EITC is a refundable tax credit used to help low-income tax individuals supplement their income. The accounts of the credit for 2017 are between $510-$6,318.
Death and Taxes
Death and taxes are the only two certainties in life, but you can significantly minimize the taxes you pay by taking every deduction available to you.
And it’s perfectly legal to do so. The government doesn’t condone tax fraud, but they do condone tax avoidance. So avoid what you can.
Lagunitas Brown Shugga’: An American strong ale.
Investable: Research and evaluate rental properties.