There are so many moving parts to an income tax return that it can be hard to keep track of everything. It isn’t unusual for the average taxpayer to be distracted by the difficult details and to miss the easy ones. In some ways, preparing a tax return is like taking a multiple choice test: Knock the easy ones out first, then move on to the ones that require more complicated calculations and documentation.
Some of the easiest things to miss are tax deductions, and when it comes to deductions, there are two things to remember. First, everyone can claim a tax deduction. There is no special handshake to get into the deduction club; we are all eligible. That doesn’t mean that we all benefit from every deduction, but we are, nevertheless, eligible.
Second, a deduction is not a tax credit. As we have explained before (here), a deduction lowers your taxable income. A tax credit reduces your tax bill — that is, a credit directly affects how much you owe, not how much you made.
Most people know that cash contributions to charity are deductible. What some people may not realize is that a charitable donation of stock is also deductible. Many taxpayers use the stock contribution to offset capital gains taxes, a benefit that may be especially appealing to Californians.
In a strange twist, some taxes are also tax deductible. Taxpayers who have paid state, local or foreign income taxes may deduct those amounts from their federal returns. The same is true of real estate taxes and personal property taxes.
Medical and dental expenses are deductible. The calculations here can be tricky, but generally the rule is that medical expenses that add up to 10 percent of adjusted gross income are deductible.
While Congress wrestles with a way to reduce the student loan debt burden nationwide, the IRS allows taxpayers to deduct the interest paid on those loans. Interest paid on a mortgage loan for a primary residence is also deductible. Job-related education expenses are deductible, too.
If your business does not reimburse you for mileage or other expenses, you may deduct those. To take the deduction, the taxpayer’s expenses must total 2 percent of his adjusted gross income.
If this is more than you want to deal with, you should remember, too, that tax preparation expenses are also deductible. If you are especially confused or believe your taxes are more complicated than you can handle, you may also want to contact a tax attorney.
There are similar deductions for small businesses. To learn more about that, go to our article, “Income taxes: Common small-business deductions.”
Source: Motley Fool, “8 Tax Deductions You Shouldn’t Overlook,” Dan Dzombak, Dec. 8, 2014