With the economic crisis in full swing, everyone’s looking to pay as little on their taxes as possible, and tax deductions are the best way to make it possible.
That being said, many Americans aren’t even aware of the many tax deductions they miss out on every year, losing them hundreds of dollars that could’ve been allocated elsewhere, whether it’s a vacation fund or their savings.
Most only know about their IRA and 401(k) contributions being deductible and a few other medical expenses making the cut, but the rest is completely obscure.
The Tax Cuts and Jobs Act from 2017 completely changed how filing your taxes works for the average American, and a number of things suddenly qualified for a tax deduction, some of which are outright strange and made the list without any explicable reason as to how or why.
What is a tax deduction?
Generally, people tend to confuse tax deductions and tax credits, which are two very different things, as deductions apply to one’s adjusted gross income whereas tax credits reduce the total amount you owe.
What this means is that tax deductions reduce the amount of your income that will be subject to taxes, sometimes even allowing you to be put in a lower tax bracket, which allows for additional perks.
On the other hand, a tax credit will reduce the amount you owe to the IRS dollar for dollar.
With this in mind, receiving a $2k tax credit means you can lower your entire tax bill by the same amount, allowing you to save thousands of dollars every year.
Of course, this doesn’t mean that your tax credits will be as large, but anything you can get is worth taking, as it’s essentially free money you’ve been missing out on.
Itemized vs. Standard deductions
The Tax Cuts and Jobs Act changed the way standard tax deductions work, making it even less advantageous to itemize any of your deductions, as the standard deduction was practically doubled.
If you look at things this way, itemizing your deductions only pays off if they exceed the standard deduction, which is highly unlikely due to the effects of the TCJA that was implemented in 2017.
Single taxpayers and married individuals that separately file their taxes are eligible for a deduction of up to $13.85k, whereas couples filing jointly have access to a tax deduction totaling $27.7k.
Itemizing only makes sense if the deduction is greater than the standard deduction, and you should remember that the IRS made it possible for you to write off state and local income taxes and sales taxes when itemizing your deductions.
Of course, you should consider that itemizing can take a bit longer due to the greater amount of forms you’ll have to fill out, and if it’s only for the sake of saving a couple of extra dollars, it’s probably not worth it.
Most work-related deductions are limited to self-employed business owners or those running a business out of their home, but there are a few exceptions for those employed full-time by someone else.
Your work-related expenses should always be itemized, as it shields you from a tax audit while also giving you a clearer view of all your expenses, whether it’s gas, home office costs, education expenses, or any other money spent on running your business.
Office supplies deductions are only available to self-employed individuals, and they apply for a number of different hardware devices such as printers, copiers, and computers as well as certain software that is commonly used in an office.
These deductions also apply to paper, file folders, pens, staples, and any other equipment that may be required to maintain a steady workflow in the office.
Medical and dental deductions
Medical expenses can easily put a dent in anyone’s finances, and thankfully, most of those exceeding 10% of one’s AGI are tax deductible.
However, some of these expenses are about as obscure as they come, and you’ll be surprised to find out that owning a pool is considered to be tax deductible in certain cases.
Yes, you heard correctly, as long as you’ve got a medical condition that can be dealt with by exercising in a body of water, you can get a small tax break from owning a pool.
This does require certain documentation from your doctor for the IRS to confirm, but apart from that, you should be in the clear in the case of a tax audit.
Thousands of dollars are lost every year on unclaimed tax deductions, and the IRS couldn’t be happier.
Carefully examine all your expenses and determine whether there’s any money you may be missing out on, and if you do, make sure to keep it in mind when the tax season comes rolling in.
A few grand extras never hurt anybody, and it may just help you meet certain financial goals you had in mind.