It’s, well, common for people to wonder about the most common tax deductions, given that everyone inevitably feels the tab is too high. We’ve also heard a lot about companies and the super wealthy largely skirting taxes because of deductions and creative accounting, so it’s fair to wonder how we can join the party.
Indeed, taxpayers claim roughly $1.7 trillion in deductions annually, so being aware of the most common ones can certainly help you save and not being aware will cost you. Everyone gets what is called a standard deduction – the amount of which varies by year and filing status – if they do not itemize their expenses on their tax returns. Whether to itemize or not largely depends on whether individual deductions in the following major categories would exceed the amount of the standard deduction.
Homeowner’s Costs: There are a number of deductions related to home ownership that you might qualify for. One of the most common tax deductions is that related to mortgage interest. You can deduct the full cost of your annual mortgage interest if you are the party liable for the home loan and the home is “qualified,” which simply means that it has places to cook, sleep, and use the restroom.
Discount points (i.e. amounts paid to lower the interest rate on a home loan) can also be deducted. For new mortgages, you can deduct in a single year the full amount paid for discount points, while you can only deduct a fraction each year after refinancing (e.g. each year, you can deduct 1/30 the cost of discount points purchased in refinancing a 30-year mortgage).
Finally, you can deduct state, federal, and foreign real estate taxes as well as up to $500 in energy-saving home improvements (e.g. new insulation).
State and local taxes: You can either deduct state and local income taxes or state and local sales taxes. Which to choose is a no-brainer for people living in states without one or the other. If you don’t live in such a state, the income tax deduction will likely be more beneficial, but if you’ve made a big-ticket purchase (e.g. a car, motorcycle or boat) in the past year, it might be reason enough to go for the sales tax deduction. The IRS has tables online for how much you can deduct based on where you live and how much you make – remember to add the sales tax from any significant purchases (up to the amount paid at the general tax rate) to these amounts.
Medical Expenses: You can deduct certain medical expenses (e.g. prescriptions, doctor’s appointments, etc.) in addition to logistical costs related to your medical expenses (e.g. parking and gas). Deductible expenses must be related to the prevention, diagnosis, treatment and cure of disease (i.e. not things like cosmetic procedures, health club membership fees, nutritional supplements), and only the amount of those expenses that exceed 7.5% of your adjusted gross income can be deducted.
Charitable donations: This not only includes money you give, but also donated credit card rewards, materials purchased when volunteering, gas and tolls paid when driving for a charitable organization, and donated goods.
Job-search expenses: You can generally deduct cab fare, printing costs, business cards, and mailing costs associated with looking for a job. If you have to travel out of town for an interview, food and lodging can also be deducted. This does not apply to people looking for their first jobs; however, if your first job takes you more than 50 miles from your old home, you can deduct certain moving costs.
Baggage Fees: If you are self-employed and travel for business, you can deduct the cost of checking luggage on a flight.
Estate IRA: If you inherit an IRA from a friend or relative’s estate, which qualified for the federal estate tax, you can deduct the interest this account added to the estate’s tax bill as you withdraw funds.
Education: You can deduct interest from a student loan and, if your adjusted gross income is less than $80,000, get up to a $2,500 credit for education expenses incurred during the year (American Opportunity Credit).
Reservist Travel: If you’re a military reservist who travels more than 100 miles from home for training and drills that require an overnight stay, you can deduct the cost of lodging and 50% of your meals as well as gas if you drive your own car.
Medicare for the Self-Employed: People who run their own businesses after qualifying for Medicare can deduct premiums and Medigap insurance costs.
Childcare: If you have to pay for childcare while working, you can get a tax credit worth 25% - 35% of the cost.
WalletHub Answers is a free service that helps consumers access financial information. Information on WalletHub Answers is provided “as is” and should not be considered financial, legal or investment advice. WalletHub is not a financial advisor, law firm, “lawyer referral service,” or a substitute for a financial advisor, attorney, or law firm. You may want to hire a professional before making any decision. WalletHub does not endorse any particular contributors and cannot guarantee the quality or reliability of any information posted. The helpfulness of a financial advisor's answer is not indicative of future advisor performance.