Top 10 Overlooked Tax Deductions and Credits You Need to Know

Understanding the Top 10 Overlooked Tax Deductions and Credits

What are Tax Deductions?

A tax deduction lowers your taxable income, reducing how much of your income is subject to tax.

The IRS allows taxpayers to lower their taxable income by choosing either the standard deduction or itemized deductions, which include the SALT deduction. The SALT deduction lets you deduct a combination of property taxes and either state and local income taxes or state and local sales taxes. Choosing between deducting state and local income taxes or state and local sales taxes can depend on the taxpayer’s state of residence and which option provides the greater benefit.

Above-the-line vs. Below-the-line Deductions

Contributions to a retirement account or health savings account and student loan interest payments are referred to as “above-the-line” deductions.
Below-the-line deductions, on the other hand, are qualified expenses that are subtracted from your adjusted gross income to help determine your taxable income.

Homeowner Tax Deductions

Mortgage Interest Tax Deduction

The mortgage interest tax deduction is touted as a way to make homeownership more affordable.
It cuts the federal income tax that qualifying homeowners pay by reducing their taxable income by the amount of mortgage interest they pay.

Deducting Mortgage Points

You may know that you can deduct mortgage interest, but mortgage points are also tax-deductible for those who itemize deductions.
Mortgage points, sometimes referred to as loan origination fees, are tax-deductible.

Home Office Tax Deduction

If you use part of your home regularly and exclusively for business-related activity, the IRS lets you write off certain home office deductions for associated rent, utilities, real estate taxes, repairs, maintenance, and other related expenses.

Charitable Contributions

Tax-Deductible Charitable Contributions

If you itemize deductions, don’t forget about charitable contributions you made throughout the year.
These can include cash, property, and out-of-pocket expenses incurred for volunteer work.

Out-of-Pocket Charitable Contributions

You can deduct expenses related to traveling for charity, but not the value of your time or service.
Keep receipts for public transportation, mileage logs, and parking and tolls.

Education and Student Tax Deductions

Student Loan Interest Tax Deduction

You can deduct up to $2,500 (or the actual amount, whichever is less) of student loan interest paid in 2023.
The interest paid can be on any qualified student loan taken out for yourself, a spouse, or someone who was dependent at the time you took out the loan.

Lifetime Learning Credit (LLC)

Students taking undergraduate, graduate, or professional learning classes can claim up to 20% of the first $10,000 spent on qualified education expenses.
The credit starts to phase out once your income reaches $80,000 as a single filer or $160,000 for couples, and those making more than $90,000 or $180,000 as a couple cannot claim it at all.

American Opportunity Tax Credit

The American opportunity tax credit, sometimes shortened to AOC, lets you claim all of the first $2,000 you spent on tuition, books, equipment, and school fees — but not living expenses or transportation — plus 25% of the next $2,000, for a total of $2,500.

Medical Expenses

Tax Deductions for Medical Expenses

The IRS allows a deduction for medical expenses, but only for the portion that exceeds 7.5% of your adjusted gross income.
You can deduct transportation and travel costs related to medical care.

Long-Term Care Insurance

A portion of the money you pay for long-term care insurance can minimize your tax burden.
The IRS lets you deduct an increasing portion of your premium as you get older.

Travel for Medical Care

You can deduct transportation and travel costs related to medical care, but only if the total exceeds the 7.5% limit.
Keep in mind that you can only deduct up to $50 per person per night of lodging.

Work-Related Tax Deductions

Child and Dependent Care Credit

Parents and caregivers with earned income can claim a credit for out-of-pocket expenses for children younger than 13 or adult dependents who need paid care.

Additionally, the child tax credit is a tax break for families with children under the age of 17. To qualify, there are specific income requirements, and eligible tax filers could receive up to $2,000 per child.

The credit amount depends on your income and the number of dependents you have, with a maximum credit of $3,000 for one dependent or $6,000 for two or more dependents.

Educator Expenses Tax Deduction

If you’re a schoolteacher or other eligible educator, you can deduct up to $300 spent on classroom supplies.
Spouses who are both educators and file jointly get a deduction of $300 each, making them eligible to claim up to $600 on their return.

Other Overlooked Tax Deductions

Vehicle Sales Tax Deduction

You may be able to add the cost of vehicle registration to your deductions for personal property taxes.
Check the registration paperwork to see if you are paying property taxes on your vehicle, RV, or boat.

SALT Deduction

The state and local tax (SALT) deduction allows taxpayers to deduct state and local taxes paid to certain governments.
This deduction is only available to those who itemize rather than take the standard deduction.

Tax-Deductible Moving Expenses

Moving expenses are only tax-deductible for Armed Forces members.
Only expenses incurred for moves due to a military order and for a “permanent change of station” are deductible.

Maximizing Your Tax Savings

How to Reduce Your Tax Bill

Take advantage of tax credits and deductions to reduce your tax bill, even if you take the standard deduction.
Itemize deductions to lower your bill, especially if you’ve made significant changes in your life.

Adjusted Gross Income (AGI) and Tax Savings

The standard deduction is the portion of your income not subject to income tax.
You can take the standard deduction if you don’t itemize your deductions on Schedule A.

Claiming Tax Deductions Without a Receipt

The IRS requires taxpayers to keep documentary evidence to support reported expenses.
Alternatives to receipts, such as canceled checks and credit or debit card statements, might be acceptable.

Credits and Incentives

Earned Income Tax Credit (EITC)

The earned income tax credit (EITC) is a refundable tax credit designed to supplement wages for low-to-moderate income workers, both with and without children.

For 2023 (taxes filed in 2024), the credit ranges from $600 to $7,430, depending on how many kids you have, your marital status, and how much you made.

Retirement Savings Contribution Tax Credit

Contributions to traditional IRAs and 401(k)s aren’t taxed, but some people who contribute to these (and select other) retirement accounts qualify for even bigger tax breaks.
The Saver’s Credit allows eligible filers to claim a tax credit worth up to $2,000 ($1,000 for single filers).

Solar Tax Credit

The solar tax credit, also known as the “residential clean energy credit,” can get you up to 30% of the installation cost of solar energy systems, including solar water heaters and solar panels.

Energy Efficient Home Improvement Tax Credit

The energy efficient home improvement tax credit, revamped under the Inflation Reduction Act, allows homeowners who purchased qualifying home upgrades — such as energy-efficient windows, doors, and heat pumps — to recoup up to $3,200 on those investments when they file their tax returns.

Electric Vehicle Tax Credit

The nonrefundable EV tax credit ranges from $3,750 to $7,500 for tax year 2023.
Taxpayers can also get a credit of up to $4,000 for used cars.
Eligibility depends on a number of rules, including income, price of the vehicle, and whether the car meets IRS manufacturing guidelines for qualified EVs.