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List of 16 Commonly Overlooked Personal Tax Deductions & Credits for Individuals

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Tax time is stressful, but it helps to be aware of possible deductions ahead of time so that you can keep appropriate documentation to maximize deductions and credits and pay the lowest tax possible.

Even the IRS encourages you to take every legitimate means to reduce your tax liability. This includes claiming all the deductions and credits for which you are eligible. The following notes serve as reminders about which deductions and credits you may qualify for – many of which are frequently overlooked.

For help with other issues, check out our complete Tax Guide.

Top Overlooked Tax Deductions

1. Tax Preparation Fees

(Schedule A, Line 22)
You can generally deduct the costs of preparing your taxes as a miscellaneous deduction on Schedule A in the year you pay them. For example, if in 2016 you pay for the preparation of your 2015 taxes, you deduct the cost on your 2016 Schedule A.

However, fees for preparing Schedule C for a small business, Schedule E for rents or royalties, or Schedule F for farm income should be deducted on those schedules. All remaining fees may be deducted on line 22 of Schedule A. You can also deduct the cost of tax preparation software, tax publications, or a fee for electronically filing your taxes. If you paid your taxes by debit or credit card, you can also deduct any convenience fees.

2. Hobby Expenses

(Schedule A, line 23)
Hobby activities are defined for tax purposes as activities engaged in for sport or recreation, not for profit. However, some hobbies generate income. That income must be reported on your tax return. To offset the impact of that income on your taxes, you can deduct the expenses of the hobby on Schedule A, up to the amount of the income each year.

For example, let’s say you make monkey dolls out of work socks and sell $200 worth. If it costs you $500 for the materials to make the dolls, you can only deduct $200 of the expenses on Schedule A. These expenses are reported on line 23 and are subject to the 2% of AGI floor.

This deduction helps you recoup some of the expenses when a small business that has not made a profit in three of the past five years is deemed by the IRS to be a hobby. For a more complicated scenario, involving a portion of your home used for your hobby activity, see Publication 535.

3. Personal Legal Bills

(Schedule A, line 23)
Personal legal bills may be deductible on Schedule A, line 23, as a miscellaneous deduction subject to the 2% AGI floor, as long as the lawyer is pursuing taxable income on your behalf or is working on the determination, collection, or refund of any tax.

For example, if you paid a lawyer to recover past-due alimony, the lawyer’s fee may be deductible if you itemize. You can also deduct legal fees related to doing or keeping your job. For example, you may need a lawyer to defend yourself against a lawsuit on a work-related matter, such as a discrimination case brought by a terminated employee.

4. Educator Expenses

(Form 1040, Line 23)
If you are an eligible educator, you can deduct up to $250 of unreimbursed expenses for professional development courses, books, supplies, computer equipment, related software or services, other equipment, and supplemental materials for classroom use.

You are an “eligible educator” if you worked as a K-12 teacher, instructor, counselor, principal, or aide for at least 900 hours in an elementary or secondary school. If both taxpayer and spouse are educators and file jointly, they can deduct up to $250 each of their own expenses.

For limitations on these amounts, see Tax Topic 458. Amounts in excess of the $250 may be claimed as an unreimbursed employee business expense (subject to the 2% of AGI floor) on Schedule A, Itemized Deductions, line 21.

5. Charitable Miles

(Schedule A, line 16)
It is well known that cash or goods donated to charities can generate a tax deduction if you itemize. Yet folks generally overlook the fact that their miles driven to do charitable work are also deductible, at a rate of $0.14 per mile for 2016. You can also deduct tolls and parking fees. If you use your vehicle in your charitable work, keep a log of those miles and claim them at tax time as an itemized deduction.

6. Contributions to Fraternal Orders or Societies

(Schedule A, line 16)
Dues required for membership in these organizations are not deductible. Donations in excess of required dues are deductible as long as they will be used by the organization for qualified charitable purposes.

For example, contributions to the Shriner’s hospital funds are one such deduction. Such deductions may be claimed up to 30% of your adjusted gross income (Form 1040, line 38).

7. Losses Due to Theft or Casualty

(Schedule A, line 20)
Losses caused by theft, vandalism, fire, storm, or similar causes, as well as car, boat, and other accidents, may be deductible. You may also be able to deduct money you had in a financial institution and lost due to the insolvency or bankruptcy of the institution. There are three limits on the losses you can claim:

  1. Only the amount not reimbursed by insurance may be claimed.
  2. The amount of each occurrence must be more than $100.
  3. The total amount of all losses (reduced by $100 for each loss) must be greater than 10% of AGI (Form 1040, line 38).

To figure the amount of the deduction, you must complete Form 4684, Casualties and Thefts. For more information, you can consult Tax Topic 515 or Publication 547, Casualties, Disasters, and Thefts.

8. Retirement Savings Contribution Credit

(Form 1040, line 51)
You may be eligible for this nonrefundable credit if you contribute to an eligible retirement plan, such as a 401k plan at work, or to an IRA — traditional or Roth. The credit can be as much as $1,000 ($2,000 if MFJ). The maximum contribution on which the credit is based is $2,000.

The amount of the credit varies between 10% and 50%, depending on your AGI (Form 1040, line 38) and filing status. See Form 8880 to determine your percentage factor from the table of income brackets and filing statuses.

This credit is disallowed if your AGI is above these amounts:

  • $30,750 if filing Single, MFS or Qualifying Widow(er)
  • $46,125 if filing Head of Household
  • $61,500 if filing Married Filing Joint

For more information, see our Retirement Contribution Credit Guide.

9. Education Credits

(Form 1040, line 50)
Many people take courses at community colleges, colleges, or universities to maintain or improve skills, complete continuing education credits to maintain certification, pursue a hobby or other special interest, or for self-improvement. Because the student might not be in a degree program, the maximum $2,000 tax benefit of the Lifetime Learning Credit is frequently overlooked.

To claim the credit, you must meet three requirements:

  1. You must pay qualified expenses for higher education.
  2. You must pay those expenses for an eligible student.
  3. The eligible student must be you, your spouse, or a dependent for whom you claim an exemption on your tax return.

According to IRS Publication 970, qualified expenses are “tuition and certain related expenses required for enrollment in a course at an eligible education institution. The course must be either part of a postsecondary degree program or taken by the student to acquire or improve job skills.” So those hobby-related and self-improvement courses are not qualifying expenses, unless they also are job-related. Any tax-free educational assistance (scholarships, grants, employer-provided assistance, Veterans’ education benefits) must be subtracted from your educational expenses to determine qualified expenses.

The credit is 20% of the first $10,000 in qualified educational expenses. It is claimed on Form 8863. The American Opportunity Credit is claimed on the same form.

The American Opportunity Credit is the best known of the education credits. It is a tax credit of up to $2,500 of tuition, fees, and course materials (not necessarily purchased from the educational institution). Up to 40% of that amount, or $1,000, may be refundable. The credit is based on maximum qualifying expenses of $4,000, and is calculated as 100% of the first $2,000 and 25% of the next $2,000. Up to $1,000 is refundable, even if you have no tax liability.

Three provisos:

  1. The American Opportunity Credit only applies to the first four years of undergraduate post-secondary study.
  2. You cannot claim more than one education credit for the same student in the same year. You also cannot claim the Tuition and Fees deduction in the same year you claim either education credit.
  3. You cannot claim any education credit if your filing status is married filing separate (MFS).

You may be able to deduct work-related educational expenses as an itemized deduction. To qualify, the education must:

  1. Maintain or improve your job skills
  2. Be a requirement of your employer or a law to keep your salary, status, or job
  3. Not be to meet the minimum requirements of a new or first job

Expenses that you can deduct include:

  1. Tuition, books, supplies, lab fees, and similar items
  2. Certain transportation and travel costs
  3. Other educational expenses, such as the cost of research and typing

To take the deduction, you must fill out Form 2106, Employee Business Expenses, the total of which transfers to Schedule A, line 21, miscellaneous deductions subject to 2% of adjusted gross income.

10. Property Taxes on a TimeShare

(Schedule A, line 6)
Property taxes on a timeshare may be deducted as an itemized deduction. These taxes are included in your annual maintenance fee and may be stated separately on the statement. If you sold a home or timeshare, any property taxes paid should be stated on the settlement statement.

But take care to check if any property taxes were reimbursed by the buyer. If you receive a 1099-S, the reimbursed amount is noted in Box 6.

11. Last Year’s State Income Taxes

(Schedule A, line 5, checkbox “a”)
If you owed state taxes in 2015 and paid them in 2016, deduct them as an itemized deduction on Schedule A in 2016.

Instead of deducting state income tax, you may choose to deduct state general sales tax (Schedule A, line 5, and mark checkbox “b”). You may deduct your actual sales tax (having kept all of your receipts), or use the worksheet and the state and local sales tax tables in the Instructions for Schedule A.

If you choose this option, you can also include the sales tax on big-ticket items, such as a vehicle, boat, airplane, or materials for renovation (if sales tax is separately stated on the invoice). The general sales tax depends on the number of exemptions on your tax return, your AGI and the state and county in which you live.

12. Penalty on Early Withdrawal of Savings

(Form 1040, line 30)
If you cashed in a CD, for example, before its maturity date, the bank may have charged a penalty. This is usually reported in Box 2 of Form 1099-INT. The penalty is deductible as an adjustment to income, to lower your taxable income. A penalty may also be found in Box 3 on Form 1099-OID, if you receive one.

13. Medicare B and D Premiums

(Schedule A, line 1)
If you itemize deductions, you can deduct the premiums for Medicare Parts B and D as a medical expense. Also, if you are not entitled to social security benefits, you can deduct premiums you voluntarily paid for Medicare Part A coverage. The allowable amount of medical expenses that are deductible is the excess over 10% of your AGI (or 7.5% of AGI, if you are 65 or older). These two rates apply through tax year 2016. Beginning in 2017, the 10% of AGI threshold will apply to all filers.

14. Breastfeeding Equipment and Pumps

(Schedule A, line 1)
According to the Instructions to Schedule A, the cost of breast pumps and supplies that assist lactation are deductible medical expenses. Since these devices and supplies can be expensive, adding them to your medical expenses may help you exceed the 10% medical deduction threshold.

15. Financial Planning and Management Expenses

(Schedule A, line 23)
If you subscribed to an investment newsletter, paid a financial advisor, had an attorney prepare a living will or trust, or otherwise spent money to manage your money, such expenses are deductible subject to the 2% AGI threshold.

16. Credit for the Elderly or Disabled

(Form 1040, line 54)
If, by the end of the tax year you are 65 or older, or retired on permanent and total disability and you received taxable disability income, you may qualify for this credit. The maximum amount of the credit is $1,125. It is based on 15% of an amount determined by completing Schedule R. It is a nonrefundable credit, which means it can reduce your tax liability. If you do not have any tax liability, you do not qualify for the credit.

The income limits to qualify for this credit are:

  • AGI of $17,500 or $5,000 Nontaxable Social Security and Pensions, if filing Single, Head of Household or Qualifying Widow(er)
  • AGI of $20,000 or $5,000 Nontaxable Social Security and Pensions, if filing Married Filing Joint with one spouse eligible
  • AGI of $25,000 or $7,500 Nontaxable Social Security and Pensions, if filing Married Filing Joint and both spouses are eligible
  • AGI of $12,500 or $3,750 Nontaxable Social Security and Pensions, if filing Married Filing Separate and lived apart

Final Word

It may seem cumbersome to keep track of all these deductions and credits as there are so many qualifiers, especially for the credits. But they can add up to sizable savings to help reduce your taxable income and overall tax burden. Keeping a set of files on paper or electronically to record the expenses as they occur can help simplify the process at tax time.

If you receive a refund, consider adding to an emergency fund, paying down credit card debt, or supplementing your retirement savings account. Remember, contributions to an IRA can be made up to the due date of the return and still be claimed on that return. Just be sure your plan administrator knows the contribution is for the prior calendar year if you make it between January 1 and the April due date.

For help with other issues, check out our complete Tax Guide.

Which of these credits and deductions are you taking advantage of?

Gary Tuttle
Gary's extensive professional background varies from small business owner to school administrator. Most recently, he has been involved in taxes, first as a certified preparer, and later as a tax software developer. He is currently licensed to practice before the IRS, volunteers as an instructor for AARP's Tax-Aide program, and has his own tax practice.

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