Tax deductions and credits can make a big difference in how much you owe on your tax return—and that’s true for individuals and businesses alike. However, too many people are unaware of all of the deductions and credits they qualify for, and they end up missing out on hundreds (if not thousands) of dollars in tax breaks. We’ve put together a list of some of the most commonly overlooked tax deductions and credits. While it’s far from a comprehensive list, you still might find a few tax breaks you didn’t know you were missing.
Millions of parents rely on childcare in order for them to go to work each day. Whether it’s full-time childcare or just a couple of hours after school, that cost can add up significantly over the course of a year. If you pay someone to care for your child while you work, be sure you’re taking advantage of the childcare tax credit. This credit can be worth between 20% and 35% of what you’re paying in childcare costs, effectively “reimbursing” you hundreds of dollars or more in those expenses.
For example, let’s say you have one child in a daycare center, and it costs you $800 per month. (This is the average cost per month for American parents.) This adds up to a total of $9,600 in childcare expenses each year. If you qualify for the maximum credit amount, you can reduce your tax bill by $3,360 for that year. Is that really a tax break you can afford to miss out on?
American Opportunity Credit
The cost of secondary education has risen dramatically over the last several decades. And while there may be no signs of that cost declining any time soon, you can reduce the financial burden of paying for a college education if you take advantage of the American Opportunity Credit. This credit reduces your tax bill by up to $2,500 for every student you’re supporting in college—whether it’s your child or yourself.
This amount is based on 100% of the first $2,000 spent on eligible college expenses, and 25% of the next $2,000. So, if you’re putting two of your kids through college, and you qualify for the maximum credit for both of them, you can reduce your tax bill by $5,000 that year. Note that this credit does phase out at certain income levels, and the credit is “nonrefundable.” This means that if you only owed $4,200 in taxes, and qualified for the $5,000 in credits, you would not receive $800 from the IRS; your tax bill would simply be reduced to $0.
Lifetime Learning Credit
Of course, college is not the only way to further your education. If you’re investing in yourself to develop or improve marketable job skills, you could qualify for the Lifetime Learning Credit. This credit is based on 20% of up to $10,000 in expenses for post-high-school courses. This includes courses taken at a community college or vocational school.
As with the American Opportunity Credit, this does phase out at certain income thresholds, and is a nonrefundable credit.
Few taxpayers will overlook their charitable deductions entirely; however, most don’t actually include all qualifying donations in their charitable contributions. Large cash donations to charities are easy to spot on your bank statements, and these will typically end up on your tax returns. But smaller donations, particularly non-cash ones, are much more likely to get overlooked.
If you donate used clothing to your local Goodwill or Salvation Army, give new toys to Toys for Tots, or contribute winter clothes and blankets to a local charity, all of these items qualify as a deductible donation. The items you donate have a value, and those non-cash contributions can add up quickly throughout the year.
This applies to individuals as well as businesses. Many companies will often sponsor local charity runs, donate products to silent auctions, or perform other acts of charity that don’t involve cash donations. While it may be harder to track these donations on your books, they still have value in terms of your tax deductions. Be sure to keep a detailed list of items you donate and request receipts for donated items whenever you can. You’ll be amazed at how quickly the value of those items can add up to a major deduction.
Should You Be Itemizing Your Deductions?
With all of this being said, it should be pointed out that the deductions listed above only matter if you’re itemizing your deductions on your return. (The tax credits are a different matter, and apply whether you’re itemizing or taking the standard deduction.) So, should you be itemizing? Is it worth the effort?
As with most tax topics, the answer is, “It depends.” We can help you to go over your deductions and determine the best route to take with your return, while making sure you’re not missing out on any important deductions. Contact Peter Witts CPA today to schedule a consultation with one of our tax experts.