Too often, taxpayers pay more taxes than necessary due to overlooking certain tax deductions. Here are five tax deductions commonly missed when filing a return to help you keep more of your own money. Knowing these may help you save during tax season. Find your PriorTax dedicated tax professional to assist you for free from start to finish.
Don’t miss out on more than $1 trillion in Tax Deductions
Don’t miss your chance to take advantage of the over $1 trillion in tax deductions available. Research indicates that around 45 million taxpayers have utilized itemized tax deductions worth an amazing $1.2 trillion in their 1040s. These are truly astounding numbers.
In 2023, taxpayers who opted for the standard tax deduction were estimated to total about $750 billion. However, many of these people may need to realize they are potentially missing out on tax deductions they could have taken advantage of. (Any taxpayer who is aged 65 or over this year should note there is a bigger standard tax deduction than those under 65.)
When it comes to taxes, you want to do everything possible to get the biggest refund you can. To help out, we’ve identified five tax deductions that are often overlooked.
1. DRIPs Reinvested Dividends
Taking advantage of reinvested dividends can be a great way to reduce taxes significantly. Unfortunately, many people overlook this strategy. It isn’t technically an official tax deduction, but the savings it provides can be substantial. When investing, many investors opt to have their stock and mutual fund dividends automatically reinvested in additional shares. This choice can be beneficial come tax time since it increases the investor’s “tax basis,” – thereby reducing the taxable capital gain (or increasing the potential for a tax-saving loss) when they sell their shares.
2. Student Loan Interest Payments
In the past, receiving a tax break was impossible when someone other than the loan recipient repaid a debt. To be eligible for any deduction, both accountability of the loan and personal payment were required. This meant that even when parents paid back loans on behalf of their children, they did not receive any form of taxation relief.
In this case, there’s a unique exception. You may be aware that you have the potential to take a deduction. Yet, even when somebody else reimburses the loan, the Internal Revenue Service treats it as though they gave you the money personally, and then you paid off the debt. Therefore, an independent student can potentially tax deduct up to $2,500 of student loan interest whether or not they claim to be dependent.
3. Child and Family Dependent Care Tax Credit
Making the most of tax credits can reduce your tax bill substantially. The tax credit for Kids and Dependent Care takes this concept even further, providing a dollar-for-dollar reduction in taxes owed. It is much more painful to miss out on an opportunity like this than a deduction that merely reduces the amount of taxable income.
The Child and Dependent Care Tax Credit may be easily forgotten when paying for childcare expenses through a tax-favored reimbursement account at work. For 2022, the legal limit is $5,000 of such costs that can go through this plan. However, even though up to $6,000 in care bills could qualify for the credit, the amount paid from a tax-exempt account will not be considered part of it.
By contributing at least $5,000 to a plan at work, you could be eligible to receive the Child and Dependent Care Credit. This credit can cut your tax bill up to $200 based on 20 percent of the costs associated with childcare. Low-income households are even entitled to a higher percentage of credit amount.
In 2021, the American Rescue Plan made a massive impact on the Child and Dependent Care Credit and the amount of taxpayers that will benefit from its highest rate. Signed into law on March 11th, the new legislation vastly increasing this credit makes it fully refundable, too – so even those who do not owe taxes can reap its rewards.
Changes to the Child and Dependent Care Tax Credit
There are certain modifications to the Child and Dependent Care Credit for the tax year 2022 (the taxes you file in 2023).
For taxpayers claiming a tax credit for qualifying child and dependent care expenses, an increase in what is allowed to be claimed has gone into effect. Up to $8,000 can be claimed for one qualifying individual and up to $16,000 for two or more individuals.
The tax year 2022 brings increased benefits for individuals who utilize a dependent care flexible spending account (DCFSA). Specifically, those whose adjusted gross income (AGI) is up to $125,000 will have their credit percentage reduced. Furthermore, up to $10,500 of employer-provided dependent care services can be received tax-free, an increase from $5,000 in previous years.
4. EITC Earned Income Tax Credit
The IRS estimates that 25% of taxpayers who qualify for the EITC Earned Income Tax Credit fail to claim it each year. This significant omission is attributed to an array of factors, such as confusion over eligibility criteria and the need for knowledge on the availability of the tax credit. Millions of lower-income citizens still take advantage of this program annually despite these issues.
In 2022, eligible taxpayers can receive a refundable tax credit known as EITC to supplement their wages. This credit amount ranges from $560 to $6,935, depending on different tax filing statuses. It’s important to note that this credit is not limited exclusively to those with lower incomes – it may also apply to those who earn moderate amounts.
Hundreds of thousands of people once viewed as “middle class” now find themselves in the “low income” bracket due to various reasons such as: getting laid off, experiencing a pay decrease, or having their working hours reduced. This has impacted many professional workers as well.
When filing taxes, it’s important to consider your income, marital status, and family size. Doing so can result in getting a refund through EITC. Even without owing taxes, you still need to file a tax return in order to receive a refund from this credit. Furthermore, those who were eligible for EITC but missed it can apply for up to three prior years of tax refunds.
5. Points in Refinancing Mortgage
Buying a house and refinancing a mortgage are both valid options for homeowners, but they involve different taxes. Those who buy a house can deduct points paid to obtain the mortgage all at one time, while those who opt to refinance their mortgage must deduct the points over the life of the new loan. For instance, with a 30-year mortgage, you can claim $33 per year for every $1,000 points you have paid.
When you sell the house or refinance again in the same year, you have an opportunity to tax deduct all of your unclaimed points. However, this isn’t applicable when you decide to refinance with the same lender.
