No one wants to pay more on their taxes than they have to. Even the IRS urges Americans to make sure they’re claiming all the credits they can.
Unfortunately, the U.S. tax code is anything but simple. And that makes it hard to ferret out where tax incentives are hiding and who’s eligible to claim them.
That’s why we are offering you this list of common — but often overlooked — tax deductions and credits. Check your records against the list and make sure you’re getting the best deal you can.
1. Charitable donations, including travel expenses
If you itemize deductions, you surely already know you can deduct your charitable contributions. This includes both cash contributions and goods donated to a charity.
What you might miss is that you can also deduct your travel expenses when you’re volunteering for a charity. For example, if you drive to a soup kitchen every week, you can deduct either your actual expenses or use a standard deduction of 14 cents per mile.
The IRS reports that these travel expenses may be deductible:
- Air, rail and bus fares
- Out-of-pocket expenses for a car
- Taxi fares
However, the government makes it clear you can’t mix volunteerism with vacations and expect to get a deduction. Here’s what the IRS says in on Page 5 of Publication 526 on Charitable Contributions:
Generally, you can claim a charitable contribution deduction for travel expenses necessarily incurred while you are away from home performing services for a charitable organization only if there is no significant element of personal pleasure, recreation, or vacation in the travel. … The deduction for travel expenses will not be denied simply because you enjoy providing services to the charitable organization. Even if you enjoy the trip, you can take a charitable contribution deduction for your travel expenses if you are on duty in a genuine and substantial sense throughout the trip.
In other words, you can’t write off a mission trip to the Caribbean if all you’re doing is dropping off supplies and sightseeing the rest of the time.
If in doubt, the IRS publication goes on to provide detailed lists and examples of volunteer travel and other expenses that can and cannot be deducted as charitable contributions.
2. State sales tax
At one time, the only taxes you could deduct on your federal return were state and local income taxes. Obviously those of you living in one of the seven glorious states that don’t have an income tax did not have that option.
Fortunately, Congress recognized your plight about a decade ago and started letting taxpayers choose between deducting their state and local income taxes or their state and local sales taxes. Unfortunately, not everyone seems to know this is an option.
For those of you living in a non-income tax state (lucky dogs), it’s a no-brainer to deduct sales tax. Everyone else: you’ll probably be better off sticking with your income tax unless you’ve bought a plane or a yacht in the past year or live in a state with high sales tax rates (I’m looking at you, Tennessee.).
If you’re not sure whether it makes sense to deduct your income or sales tax, you can use this handy calculator provided by the IRS.
3. Child and Dependent Care Credit
Here’s another one you’ve probably heard about, but you might be overlooking all the ways it can be used.
The most common way to claim the Child and Dependent Care Credit is to use it for day care expenses for kids younger than 12. The idea behind the credit is to help pay for the care your child needs while you work or look for work. But this credit also may be claimed if you live with an elderly parent or a disabled spouse whose care must be paid for while you work.
You may also be able to claim the credit for summer day-camp costs for your kids if you select a camp specifically so you can work.
4. Retirement Savings Contributions Credit
Also known as the Saver’s Credit, this tax perk is intended to encourage low-income individuals to start putting money away for retirement.
You’re eligible if you meet these criteria:
- Older than age 18
- Not claimed as someone else’s dependent
- Not a full-time student
- Meet income eligibility limits
Those income eligibility limits run from $30,500 for a single filer to $61,000 for a married couple filing jointly. Depending on where your income lands, you can get a 10, 20 or 50 percent credit off the first $2,000 you contribute to a qualified retirement plan such as a 401(k) or an IRA. If you’re married and filing jointly, you can claim a credit on the first $4,000 you contribute.
Remember, a credit gives you a dollar-for-dollar reduction in how much you have to pay in taxes. If you’re eligible, you don’t want to miss this credit. Here’s a chart from the IRS with more details about the income eligibility limits.
5. Earned Income Tax Credit
OK, this one is controversial. Many people aren’t fans of the Earned Income Tax Credit because it gives a refund to people even if they haven’t paid any taxes into the system. I know some of you don’t like that one bit, and I’m sure you’ll share your thoughts in the comments below.
In the meantime, this article isn’t about whether a credit has merit. It’s an article about credits that are overlooked. And by many accounts, the EITC is the most overlooked one in the bunch. The main reason being that those who are eligible for the EITC often aren’t required to file a tax return.
For the 2015 tax year, the credit can be up to $6,242 for married couples with three children and adjusted gross incomes of up to $53,267. Even singles with no kids can get the credit, albeit a much smaller one, if they earn less than $14,820. The credit is refundable, which means that even if you don’t owe the federal government a dime, you can still get a refund check.
If you have an income but don’t normally file a return because your wages are so low, it may be worth checking to see if you’re eligible for the EITC. You can read this article to find free tax prep services to help you out. Turbo Tax also has facts on the EITC that you might find interesting.
6. Job expenses
If you have job expenses that exceed 2 percent of your income, you can add them to your itemized deductions. Not all expenses will qualify, for example, you can’t deduct the cost of your daily lunch. But here are a few of the things the IRS says can be deducted, so long as your employer doesn’t reimburse you:
- Professional dues
- Protective gear
- Safety equipment
- Small tools
- Costs associated with job hunting
For that last one, you can deduct your expenses even if you don’t land a new job.
7. Relocation expenses
Let’s say you do land a new job. And let’s also say your new job requires you to move to a new city or state. Then, you’re in luck. You can deduct moving expenses.
To do so, your move must meet these tests:
- Distance test: Your new workplace is at least 50 miles farther from your former residence than the main workplace of your old job.
- Time test: If you’re an employee, you must work full-time for at least 39 weeks during the first 12 months after you arrive to the general vicinity of your new work area. If you’re self-employed, you must work 39 weeks during the first 12 months and 78 weeks during the first 24 months after you arrive.
There are, of course, exceptions to every rule, and the time test can be waived under certain circumstances, such as if you’re in the military or your new job is cut short because of death or disability.
If you do qualify, you can deduct 23 cents per mile if you use your own vehicle to move. Plus, you can deduct the cost of moving your belongings as well as any lodging expenses you may pay for along the way. For more details, read IRS Publication 521.
8. Education tax incentives
If you, your spouse or your dependent child is taking post-secondary classes, you’ll want to pay close attention to this section. For college students and their families, the government offers three tax incentives:
- American Opportunity Tax Credit
- Lifetime Learning Credit
- Tuition and Fees Deduction
Of these, the American Opportunity Tax Credit may give you the most money back. Up to 40 percent of the credit is refundable, meaning you can get cash back even if you don’t owe taxes, and you can get a credit of up to $2,500 per year (up to four years) for each eligible student.
As for the other two options, the Lifetime Learning Credit may be second best. As a credit, it gives you a dollar-for-dollar reduction on your taxes due. But unlike the American Opportunity Tax Credit, it isn’t refundable; so if the credit is more than your tax liability, you don’t get any of the extra amount refunded to you. The Lifetime Learning Credit can be used on qualifying expenses incurred by you, your spouse or your eligible dependent.
The final option is a deduction for tuition and fees, and you can deduct up to $4,000 in expenses each year. Unlike the credits, this deduction cannot be applied toward expenses you pay for a dependent. You can only claim it for your and your spouse’s tuition and fees.
You can only claim one of these incentives each year, so choose wisely. In addition, there are income and other eligibility requirements. You can compare your three options using this chart provided by the IRS.
What ways have you benefited from tax deductions (or not)? Share in the comments below or on our Facebook page.
Kari Huus contributed to this post.