Posted on May 7th, 2024.

Welcome to our blog post on the most overlooked tax deductions that could significantly benefit your finances. Understanding these can help you maximize your returns and minimize your tax liability effectively.

Most Overlooked Tax Deductions

Deductions for State Taxes

State Sales Tax: Many taxpayers miss the opportunity to deduct state sales tax in lieu of state income tax. This deduction is particularly valuable for residents of states that do not impose an income tax. By keeping receipts and calculating your total sales tax payments, you could potentially save a substantial amount on your taxes.

More on State Deductions: Aside from sales tax, other state taxes like property taxes or vehicle registration fees might also be deductible. Ensure to review what your state offers in terms of deductions and take full advantage.

Investment-Related Deductions

Reinvested Dividends: This deduction is commonly overlooked. If you automatically reinvest dividends from mutual funds, this increases your cost basis in the investment and reduces the capital gains tax you'll owe when you sell.

Investment Expenses: You can also deduct certain expenses related to investments, such as fees for financial advice, though there are limitations and thresholds to meet. Keep detailed records to make the most of these deductions.

Charitable Contributions

Out-of-Pocket Expenses: When you contribute to charity, it's not just cash donations that count. Expenses like ingredients purchased to prepare food for a nonprofit's event, or mileage driven for charity-related travel, are deductible. Keep your receipts and mileage logs.

Volunteer Time: While you can't deduct the value of your time spent volunteering, any out-of-pocket expenses directly related to volunteering can be claimed.

Education-Related Deductions

Student Loan Interest: If you're paying off student loans, you can deduct up to $2,500 of interest paid annually. This is applicable even if the student loan is in your name but you're paying for your child's education, and they aren't listed as a dependent.

Educational Expenses for Work: If you take courses or pursue further education related to your current job to maintain or improve your skills, these expenses can be deductible.

Employment and Relocation Deductions

Moving Expenses for New Job: If you relocated for a new job and your new workplace is at least 50 miles further from your home than your old workplace, you might be eligible to deduct your moving expenses. This is particularly pertinent for active military personnel moving due to a permanent change of station.

Job Search Expenses: Costs incurred while looking for a new job in your current occupation, including travel expenses, resume services, and outplacement agency fees, can be deductible.

Family and Dependent Care Expenses

Child and Dependent Care Tax Credit: For parents who work or are looking for work, the cost of daycare, summer camp, or other forms of child care can be deductible. This credit is crucial for many working families and can significantly reduce the financial burden of child care.

Adoption Expenses: The costs related to the legal adoption of a child can also be deductible, including court fees, travel expenses, and other directly related costs.

Credits for Low to Moderate Income Earners

Earned Income Tax Credit (EITC): One of the most significant but often overlooked tax credits, the EITC is aimed at low to moderate income earners. If there have been changes in your financial, employment, or marital status, you might be newly eligible for this substantial benefit.

Retirement Savings Contributions Credit: Also known as the Saver's Credit, this offers an additional way to reduce your taxes while saving for retirement, particularly if your income falls within certain parameters.

Most common mistakes to avoid

1. Failing to Double-Check Information

One of the simplest yet most consequential errors is the failure to double-check your tax forms for accuracy. Ensure that your Social Security number, the spelling of your name, and all figures are correct. These small mistakes can cause big delays in processing your returns.

2. Ignoring Filing Deadlines

Missing the tax filing deadline can lead to penalties and interest charges. Keep track of when taxes are due, and if you need more time, file for an extension. Remember, an extension to file is not an extension to pay any taxes owed.

3. Overlooking Deductions and Credits

Many taxpayers miss out on valuable deductions and credits because they simply aren’t aware of them. From education credits to deductions for charitable donations, make sure to research or consult with a professional to leverage all applicable tax benefits.

4. Improperly Reporting Income

Not reporting all income, whether from a side job, investments, or freelance work, can lead to audits and penalties. Ensure that you include all income sources on your tax return, even if you didn’t receive a form for some of them.

5. Choosing the Wrong Filing Status

Your filing status affects your tax rates, allowable deductions, and credits. Choosing the wrong status can result in paying more than necessary. Understand the criteria for each status, particularly if your personal circumstances have changed, like a marriage or divorce.

6. Mishandling Deduction Documentation

Keeping accurate records and receipts is crucial, especially if you decide to itemize deductions. In the event of an audit, having organized documentation can substantiate your claims and quickly resolve questions about your tax returns.

7. Not Seeking Professional Help

Taxes can be complex, and changes in tax laws may affect your returns. If your situation involves multiple income streams, investments, or potential for numerous deductions, consulting with a tax professional can prevent mistakes and optimize your tax outcomes.

8. Incorrectly Calculating Deductions

Be careful not to make errors in arithmetic or in misunderstanding how deductions and credits are calculated. Use of tax preparation software or a calculator can help avoid these errors.

9. Failing to Report Foreign Assets

If you have any foreign bank accounts, investments, or assets, you need to comply with the IRS requirements for reporting these. Failure to do so can result in severe penalties.

10. Neglecting State Tax Returns

While federal taxes get most of the attention, state tax returns are equally important and have their own set of rules and deadlines. Make sure to understand and comply with state tax obligations to avoid unexpected state tax liabilities and penalties.

Reach out for expert advice

We hope this guide has illuminated some valuable tax deductions that often go unnoticed.

If you have questions about your specific situation or need further assistance, do not hesitate to reach out to VV Taxhouse Inc. at 646-406-9320 or via email at [email protected]. Visit our website for more information on personal income tax return preparation.