When tax season rolls around, everyone is looking for ways to reduce their tax bill. One of the most effective strategies for lowering taxable income is to take full advantage of deductions. However, many taxpayers miss out on key deductions simply because they aren’t aware of them or don’t think they qualify. To help ensure you’re not leaving money on the table, here are some commonly overlooked tax deductions that could help reduce your tax liability.
1. Medical Expenses
Did you know that you can deduct certain medical expenses if they exceed a certain percentage of your adjusted gross income (AGI)? For the 2023 tax year, you can deduct qualified unreimbursed medical expenses that are more than 7.5% of your AGI. This includes things like doctor visits, prescription medications, dental treatments, and even travel costs related to medical care. If you have significant medical expenses, keeping track of all receipts and eligible expenses can result in considerable savings.
2. Charitable Donations
Most people know that donations to charity are deductible, but many don’t realize just how much they can deduct. Besides cash contributions, you can also deduct the value of non-cash donations like clothes, furniture, or household items given to qualified organizations. Even out-of-pocket expenses for volunteering, such as mileage or supplies, can be deducted. Just make sure to keep good records and receipts, as the IRS requires documentation for these deductions.
3. Home Office Deduction
If you’re self-employed or run a small business from home, you might qualify for the home office deduction. Many people shy away from claiming this deduction due to fears of an audit, but the IRS offers a simplified option that makes it easy to claim. You can deduct $5 per square foot of your home used exclusively for business, up to a maximum of 300 square feet. Alternatively, if your actual expenses (rent, utilities, and repairs) are greater, you can calculate and deduct the portion of those costs that apply to your home office.
4. Student Loan Interest
If you’re paying off student loans, you may be eligible to deduct up to $2,500 of the interest you paid during the year. This deduction is available even if you don’t itemize, which makes it especially valuable for young professionals just starting out. There are income limits, so be sure to check the IRS guidelines, but for many taxpayers, this can be an easy way to reduce taxable income.
5. State and Local Taxes (SALT) Deduction
The SALT deduction allows taxpayers to deduct up to $10,000 in state and local taxes, including property taxes, state income taxes, and sales taxes. If you live in a state with high taxes, this can provide significant relief. You can choose to deduct either state income taxes or sales taxes, whichever is higher, but not both, so be sure to do the math and see which option benefits you most.
6. Retirement Contributions
Contributing to a traditional IRA or 401(k) not only helps you save for the future but can also reduce your current-year taxable income. Contributions to these retirement accounts are tax-deductible up to certain limits, and the savings can add up quickly. For 2023, you can contribute up to $6,500 to an IRA, or $7,500 if you’re age 50 or older. For 401(k)s, the contribution limit is $22,500 ($30,000 if you’re over 50). These contributions lower your taxable income, meaning you pay less in taxes now while saving for retirement.
7. Job Search Expenses
If you’re searching for a new job in your current occupation, you may be able to deduct some of the costs associated with the search, even if you don’t land the job. Eligible expenses include things like resume preparation, travel costs to interviews, and job placement fees. Keep in mind that these expenses must be itemized, and they are subject to the 2% AGI rule, which means only the amount of your total miscellaneous deductions that exceeds 2% of your AGI is deductible.
8. Educator Expenses
If you’re a teacher, you probably spend some of your own money on classroom supplies. The good news is that you can deduct up to $300 of unreimbursed expenses (or $600 if both you and your spouse are educators). This can include things like books, classroom materials, and even professional development courses.
Conclusion
Maximizing your deductions is one of the best ways to lower your tax bill, but it requires careful planning and documentation. By being aware of commonly overlooked deductions, you can ensure you’re getting every tax break available to you. Remember, tax laws can be complex, and everyone’s financial situation is different, so it’s always a good idea to consult with a tax professional to make sure you’re maximizing your deductions and minimizing your tax liability.