Most taxpayers know about the big itemized deductions that can lower your tax bill, like mortgage interest, state income taxes, real estate taxes, and charitable donations. But these are just the most obvious ones to put on Schedule A.
If you really want to pry loose some additional money-saving deductions, you’ll need to think beyond the obvious and hunt for tax-cutters that are often ignored or simply forgotten. Read on for some of my favorites — and most overlooked — deductions.
Foreign Tax Credit
If you own a diversified portfolio of mutual funds in a taxable account, and some of your funds invest in foreign stocks, you’ve indirectly paid some foreign tax — and you should be entitled to the foreign tax credit. To find out this amount, look at your year-end tax statements in the box labeled “foreign taxes paid.” If the amount of foreign tax paid is $300 or less ($600 for joint filers), it’s a simple matter of just claiming this amount on Line 48 of Form 1040.
Credit for excess Social Security Tax
If you worked for two or more different employers last year and had combined gross wages in excess of $118,500, you paid too much Social Security tax (FICA). Because employers don’t check with each other to see if you had already earned over the maximum wage base, each one withholds Social Security tax from every dollar you earn. Claim this tax credit on Line 71, excess social security, in the payments section of Form 1040.
The downside of being self-employed is that you have to pay double the FICA tax that regular employees pay. This means while your employee friends pay 7.65 percent of income toward this tax, you’ll owe 15.3 percent on the net profit you report. The good news is that you can claim 50 percent of this tax as an adjustment, which reduces your adjusted gross income and the amount of tax you owe.
Self-employed Health Insurance Deduction
If you’re self-employed and pay the premiums for medical, dental and even qualifying long-term care insurance for you and your family, you can claim these costs as an adjustment to income. This is allowed even if you don’t itemize deductions or if your other deductions are limited.
Retirement Saving Credit
If you made contributions to a retirement account, you may qualify for a tax credit of up to $1,000 (individuals) or $2,000 (for couples). Since income limits apply, you’ll need to check with the IRS to get the details about qualifying.
If you moved to take a new job or because your current job was relocated, the moving costs you paid may be claimed as an adjustment to income. But you must meet the tests for time and distance related to the move. For example, the new work location must be at least 50 miles from your old home. The tests that apply and expenses that qualify are laid out on Form 3903, which must be included with your tax return.
Student Loan Interest
If you paid interest on a student loan, you could be eligible to claim a deduction of up to $2,500. It can be claimed even if you don’t have enough other deductions to itemize. If your parents make your loan payments, you can still claim this deduction as long as you’re liable for the loan and your parents can’t claim you as a dependent.
Education Tax Credits
Many people who paid tuition and fees for education can claim a tax credit of up to $2,500. It’s called the American Opportunity Tax Credit, and the best part is that up to $1,000 of this credit is refundable, which means you can get this money back even if you owe no tax. Another option is to instead claim a deduction of up to $4,000 of the education costs you paid. But for most students, the tax credit of $2,500 and the fact that almost half of it is refundable, makes the credit more valuable than the deduction.