Did You Miss These Major Tax Breaks on Your Last Return?
While taxes may be unavoidable, your tax liability can be significantly reduced by including all relevant deductions and credits on your tax return. But few taxpayers know enough about all of the available tax breaks to claim every one that they qualify for. Here are some of the most commonly overlooked deductions and credits on tax returns.
Itemized Deductions versus Standard Deductions
Before discussing the deductions that you might have missed, let’s talk about whether or not you should be itemizing those deductions in the first place. Missed deductions are only relevant for individuals who itemize on their tax returns, and you’ll probably only want to itemize if your deductions exceed the standard deduction amount. For 2021, those amounts are as follows:
- $12,550 for individuals
- $18,800 for heads of household
- $25,100 for joint filers
If you believe your itemized deductions may exceed the relevant amount listed above, it’s to your benefit to itemize. If not, the standard deduction will decrease your taxable income.
Please note that this only applies to deductions. Tax credits can still further reduce your tax liability, even if you choose to claim a standard deduction. So, regardless of whether you itemize or not, it’s to your benefit to continue reading to ensure you’re claiming the credits you qualify for.
First, let’s discuss some commonly missed deductions. If you own a home, many of the expenses associated with homeownership can be deducted on your tax return. Annual expenses like mortgage interest, property taxes, and mortgage insurance can be deducted on your return every year. If you have renovation and upgrade costs for your home, you can deduct the amount you spend on home improvements that are necessary for treating a medical condition (e.g., installing a wheelchair access ramp to your front door). You can also deduct home equity loan interest if that loan is used to improve or repair your home.
Another very common tax deduction is charitable donations. The majority of taxpayers won’t overlook this deduction entirely; large cash donations made to churches and charities are often included on tax returns. However, far fewer remember to include deductions for non-cash items, such as used clothing, toys, and home goods that are donated to charities.
If you donate items to organizations like Goodwill or the Salvation Army, remember to get a receipt for the items donated, and write down the estimated value of those items. If you don’t get a receipt, you can still claim those deductions, but if you’re audited, the IRS can remove those items from your tax return. Keep a detailed list of those non-cash donations, and you’ll see just how much those items can add up over the course of a year.
American Opportunity Credit
Now, let’s move on to those commonly missed credits that can apply to everyone, regardless of whether or not you choose to itemize. The American Opportunity Credit is a major tax break for anyone that’s paying for a college education—whether your own, or a family member’s. With this credit, you can get back the first $2,000 you spend on relevant college expenses, and a quarter of the next $2,000. This means an annual credit of up to $2,500 for each student that you’re sending to college. So, if you’ve gone back to college while also paying for your child’s education, you can receive up to $5,000 a year for this credit.
As with most tax credits, the American Opportunity Credit does begin to phase out at certain income levels. For individual filers making under $80,000 and joint filers making under $160,000, you should be able to receive the full credit amount per student.
Lifetime Learning Credit
Tax credits aren’t just for full-time college students. Many working professionals take continuing education courses or night classes at community colleges and vocational schools; you can receive a credit for expenses associated with those courses as well. The Lifetime Learning Credit provides a credit of up to 20% of the first $10,000 in education expenses for post-high school courses, or a maximum credit of $2,000 per year. It phases out at the same income levels listed above.
If you’re a working parent that relies on professional childcare, make sure you’re taking advantage of the childcare tax credit. This credit can help offset the high cost of regular childcare by giving you back up to 35% of your childcare expenses. With the average cost of childcare being $9,600 a year per child, this can result in major tax savings for parents.
If you’re concerned about missing out on any tax credits or deductions, or if you have questions about whether or not you should be itemizing, contact Demian & Company CPAs today.