As tax time approaches, we’ve listed out some frequently overlooked tax deductions, credits and benefits that cover a range of taxpayers. Of course, not everything can be included. Since the tax law has grown significantly in complexity over the years – it would take a huge book to list everything! But here are over 20 issues you may not be aware of and that can save you tax dollars.
Most Overlooked Tax Deductions
State Income Tax Refund
For those who took the standard deduction on their 2019 federal return, your state income tax refund received in 2020 is not taxable income. If you itemized your deductions, then the state tax was a federal tax deduction. The state tax refund received is federally taxable if you received a tax benefit from the deduction. However, in many cases, the entire refund will be tax-free if you were subject to the alternative minimum tax (AMT) for 2019. Also, if the deductible amount was reduced by the $10,000 limit on tax deductions. Or part of the deduction pushed your deductions over the standard deduction threshold. Although the Form 1099-G shows the entire amount of the refund, not all of it may be taxable. So don’t report more than necessary.
If you owed state income tax on your 2019 return and paid that tax during 2020, then that tax payment can be added to your state tax deduction for 2020. This is subject to the $10,000 limit for state and local taxes.
Social Security Taxes Deduction
Self-employed? You can deduct half of the self-employment tax that you are liable for on your 2020 net profits. (This includes Social Security and Medicare tax). You don’t have to itemize on a Schedule A to take the deduction because it is an adjustment to income.
Net Operating Loss (NOL) Carryback
The year 2020 has been challenging for many businesses. Especially business that ended up with a tax loss for the year due to COVID-19 closure orders. However, the CARES Act does allow a 5-year carryback period in which to use the loss. This way if business owners cannot utilize the full loss in 2020, they have more time. You amend prior returns to recover the taxes paid in the earlier year(s). First, you may amend your 2015 return. If not all of the loss is used on that return, then you can amend your 2016 return, and so on.
NEW and Overlooked Tax Deductions Due to COVID
Charitable Contribution Deduction for Non-Itemizers
For the first time ever, taxpayers can claim a cash charitable contribution without itemizing their deductions on Schedule A. Non-itemizers can deduct up to $300 in cash contributions per tax return. Unfortunately, the $300 limit – and not $600 – also applies to married taxpayers filing jointly. So, hold onto those receipts to substantiate the contributions.
PPP Loan Expenses
The COVID-Related Tax Relief Act confirmed that business expenses paid for with proceeds from a forgiven PPP loan continue to be deductible on the business schedule. However, this may not be true for state taxes.
Military Reservist Travel Expenses
Armed forces reservists who travel more than 100 miles away from home and stay overnight in connection with service as a member of a reserve component can deduct their travel expenses as an adjustment to gross income. (They don’t have to itemize deductions). Unreimbursed expenses for the reservist’s transportation, meals, and lodging qualify for the above-the-line deduction. Of course, subject to the 50% limit for 2020. However, the deduction is limited to the amount that the federal government pays its employees for travel expenses – i.e., the general federal government per diem rate for lodging, meals, and incidental expenses applicable to the locale as well as the standard mileage rate (57.5 cents per mile for 2020) for car expenses plus parking, ferry fees, and tolls.
Often Overlooked Tax Deductions
Child’s Private School Expenses
If your child is attending a private school, the TCJA allows up to $10,000 per year of Sec. 529 college savings plan funds to be used to pay tuition for kindergarten through grade 12. (However, tapping your college savings plan for these expenses may be detrimental to your overall long-term savings plan to pay for college tuition.)
Student-Loan Interest
If parents pay back a non-dependent child’s student loans, the IRS treats the transactions as if the money were a gift to the child and the child made the payment. Thus, the child is deemed as having paid any interest included in the payment and can deduct it as student-loan interest. This interest is deductible without having to itemize deductions, up to the annual limit of $2,500.
Extended Tax Benefits and Credits that may be overlooked
A number of tax benefits that had expired at the end of 2019 were extended, without much fanfare, and are still available in 2020. In case you missed any of them, they include the following:
- A tax credit of up to $500 for installing energy-efficient improvements in your home, including exterior windows and skylights, exterior doors, metal roofs with appropriately pigmented coatings, asphalt roofing with appropriate cooling granules, energy-efficient heating and air-conditioning systems, insulation materials, or systems designed to reduce heat loss or gain. The $500 limit is a lifetime limit, so if you’ve taken this credit in the past, you need to take into account the amount of credit you claimed previously.
- A tax credit of up to $2,500 for purchasing a qualifying electric motorcycle.
- A deduction for mortgage insurance premiums on a loan used to purchase the home (acquisition debt).
- Forgiveness of qualified cancellation of debt income on a principal residence.
- Tax credits for fuel-cell vehicles and alternative-fuel-refueling property.
Gambling Losses
Gambling losses are allowed as a deduction and can help to offset gambling winnings if you itemize deductions. The losses allowed are up to the extent of one’s gambling winnings.
Live in a State Without a State Income Tax?
Live in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming? If you do, these states do not have an income tax. Your only choice is sales tax deduction. The sales tax that can be deducted is the actual amount paid during the year. You can determine what the number is by the larger of the following:
(1) Actual receipts for purchases OR
(2) The amount from the IRS’s income-based table, PLUS sales tax paid when purchasing motor vehicles, boats, and other items specified by the IRS.
Consider These Often Overlooked Tax Deductions and Credits too
Spousal IRA
If one spouse works and the other does not, the tax law allows the non-working spouse to base his or her contribution to an IRA on the working spouse’s income. This tax benefit is frequently overlooked when spouses have been working for years, basing their individual contributions on their own income. Then one of the spouses retires. Even if the working spouse has a pension plan at work and his or her income precludes making a deductible IRA contribution, the non-working retired spouse may still make a contribution based on the working spouse’s income. Spousal contributions can also be made to Roth IRAs if the spouses’ joint income does not exceed IRS limits. As of 2020, the law was changed. Now there is no longer an age limitation for making contributions to IRAs.
Economic Impact Payment
If you qualified for an economic recovery payment, in either the first or the second round, and did not receive the amount you were entitled to, you can claim the underpayment on your 2020 tax return as a tax credit.
Economic Impact Payment Document
If you received an economic impact payment, you should have received a Notice 1444, which documents the payment you actually received. The IRS has requested that taxpayers keep this form with all other important tax records, including W-2s from employers, 1099s from banks and other payers, and other income documents and records, to support their tax deductions.
Reinvested Dividends
If you are invested in a mutual fund, you probably reinvest annual dividends. Reinvested dividends add to the basis of your investment, and when you sell the mutual fund, having a higher basis will reduce the gain. Mutual funds are required to track your basis for mutual fund shares purchased after 2012. Some even track the basis and reinvested dividends going further back. However, some do not, and it would be your responsibility to track the reinvested dividends so that you get the benefit of all reinvested dividends when you sell.
Worthless Stock
If you are like most investors, you occasionally will pick a loser stock that declines in value. Sometimes, a security can even become totally worthless when the issuing company goes out of business. Whatever you do, don’t wait until it’s too late to claim your loss. If the IRS challenges the loss and the security is found to have become worthless in an earlier year, then the current year’s loss will be denied.
Lifetime Learning Credit
The American Opportunity Credit (AOTC) is the education credit most familiar to taxpayers. This is because it is available for the first four years of post-secondary education and provides a higher credit. It also requires the student to attend the college or university on at least a half-time basis. And the student must be in a program leading to a degree or other recognized educational credential.
On the other hand, the Lifetime Learning Credit (LLC) is available for all years of post-secondary education. The credit is also for courses that acquire or improve job skills. The student doesn’t need to be pursuing a program leading to a degree or other recognized education credential. Also the LLC is available for one or more courses. Many individuals who do not qualify for the AOTC overlook the LLC.
Charity Volunteer Tax Breaks
You probably qualify for tax breaks if you volunteered your time for a charity during the COVID-19 pandemic. These rules actually apply to all charity volunteers, not just COVID-19 volunteers. Although no tax deduction is allowed for the value of services performed for a qualified charity, some deductions are permitted for out-of-pocket costs incurred while performing the services. Examples could include away-from-home travel, lodging, and meals; automobile travel; and uniforms.
Frequently Overlooked Tax Deductions for Self Employed
Self-Employed Travel Expenses
If you travel for business don’t overlook travel related tax deductions. This could be from highway tolls, porter fees, airline baggage fees, tips, taxi fares or Uber fees. Also included is car rentals, laundry, cleaning, or other incidentals while traveling. These are in addition to the normal meal, lodging, and transportation expenses.
Self-Employed Health Insurance Deduction
A self-employed individual can generally deduct 100% of the amount paid during the tax year for medical insurance, as an above-the-line expense. This would be on behalf of themselves, their spouse, and their dependents. However this is limited to the self-employed taxpayer’s net income from self-employment. This is also the case for a partner or a more-than-2%-shareholder of an S corporation.
However, no deduction is allowed for any month when the self-employed individual is eligible to participate in a subsidized health plan. This health plan could be maintained by an employer of the taxpayer, or the taxpayer’s spouse, or any dependent. Or any child of the taxpayer who hasn’t attained age 27 as of the end of the tax year. The term “subsidized” means that the employer pays at least 50% of the coverage’s cost.
Health insurance premiums claimed as an above-the-line self-employed health insurance expense cannot also be claimed as a Schedule A medical expense.
Summer Camp
Day camp costs during the summer count as expenses toward the child and dependent care credit. This is because the day camp allows you to work. However, this only applies if you are either single and working, or married and both you and your spouse work. A day camp or similar program may qualify even if the camp specializes in a particular activity. (For example, soccer or computer camp.) The credit ranges from 20% to 35% of the day camp’s cost. The cost can not exceed $3,000 for one child or $6,000 for two or more. Overnight camps do not count.
Overlooked Tax Deductions if you itemize
Medical Dependent Tax Deductions
You may not realize that you can deduct medical expenses paid for certain individuals who are not your dependents. However, this is only the case if you itemize your deductions. One such situation involves divorced parents. For example when the non-custodial parent deducts medical expenses paid for their child; even when the other parent claims the child as a dependent. Another situation, is the medical dependent. This involves paying the expenses for someone who would qualify as your dependent, except that their gross income disqualifies them. For 2020, the gross income limitation is $4,300.
Example:
The taxpayers’ adult son was seriously injured in a motorcycle accident, but did not have medical insurance. His parents paid all of his medical expenses for the year. Their son meets all of the dependent qualifications, except that his gross income of $20,000 is too much. His gross income disqualifies him. However, under the exception, they can still include his medical expenses on their 1040 Schedule A.
Income in Respect of a Decedent (IRD)
One of the most overlooked tax deductions is the IRD deduction. IRD is the acronym for income in respect of a decedent. IRD income is income that is taxable to the decedent’s estate and also taxable to the estate’s beneficiaries. Thus, it is double taxed. As a result, the beneficiaries generally receive a deduction equal to the difference between the decedent’s estate tax. (Figured with and without the taxed income.) Beneficiaries will only have this deduction if the decedent’s estate was large enough to be subject to the estate tax.
Have questions about how these or other tax issues apply to your particular tax circumstances? Please give this office a call at 360-778-2901.
Tax time is around the corner! Are you ready for 2020 taxes?
