9 tax breaks and deductions that are easy to overlook — start thinking about them now
When tax season rolls around, you may be tempted to just get the paperwork over and done with.
However, if you’re not investigating all of the tax credits and deductions out there, you’re passing up the chance to get a hefty tax refund.
It’s true that the best tax filing software will track down many opportunities like these automatically.
But if you’re working with the basics — or you want to make sure you get what you’re owed — read on to familiarize yourself with some of the most overlooked tax breaks and deductions available for your 2021 taxes.
1. Volunteer work and donations
Normally, people who take the standard deduction can’t write off their charitable contributions.
But for the 2021 tax year, you can write off up to $300 in cash donations ($600 for married couples filing jointly) to qualifying charities. The usual limits on donations have also been lifted for people who itemize their taxes.
You can also write off out-of-pocket expenses for volunteer work.
Those expenses include travel, transportation, wining and dining on behalf of a charity, gas and oil for your car and even the cost of a volunteer uniform.
To deduct these expenses, you may need documentation from the charity itself — especially if your costs total more than $250. That document should include the nature of your volunteering activity and why it should be covered as well as a detailed list of all your expenses.
2. Medical and dental expenses
While staying healthy pays dividends on its own, you can also claim medical and dental costs for yourself, your spouse and your dependents on your taxes.
Once you’ve hit more than 7.5% of your adjusted gross income (AGI), you can deduct any unreimbursed payments relating to diagnosis, cure, mitigation, treatment or prevention of disease as well as any treatments that affect the structure or function of the body.
Of course, the best thing to do is to find affordable, high-quality health insurance to reduce the amount you’re spending out of pocket in the first place.
3. Housing expenses
There’s a whole assortment of deductions you can take advantage of as a homeowner.
Whether it’s the points you pay when you refinance your home, your mortgage interest and mortgage insurance premiums, or your state and local real estate and sales taxes, you can claim some significant tax breaks.
Basically, you can claim everything from your house payments except for your principal payments and homeowners insurance — so make sure you get the best rate on your insurance policy.
4. Education expenses
Students pay an average of $35,720 a year to go to college.
To help offset these costs, the American opportunity tax credit grants students (or their parents, if the student is listed as a dependent) up to $2,500 each year for the first four years of their higher education.
When the credit is applied, if it brings the amount of tax you owe the IRS down to zero, it will return up to $1,000 to you in a refund.
To claim this credit, students should receive a Form 1098-T from their school by the end of January.
5. Student loan interest
Student debt can eat up a huge chunk of your monthly budget.
And just like with other large loans, a good portion of your payments will be interest on what you originally borrowed — though refinancing can sometimes help with that.
At tax time each year, you can deduct up to $2,500 of the interest you pay on your loan. You can claim this deduction as an adjustment to income, meaning you won’t have to itemize your deductions.
As long as you paid at least $600 in student loan interest over the year, you should receive a Form 1098-E from your lender to claim this deduction.
Keep in mind, if you have a federal student loan, there’s a good chance you won’t be taking advantage; payments have been suspended since March of last year and will stay that way until Jan. 31, 2022.
6. Child care expenses
If you have to put your child or children in daycare so you can work (or actively look for work), you can claim some of your expenses under the Child and Dependent Care Expenses credit.
How much you’ll receive is based on a percentage of what you pay your caretaker and your adjusted gross income.
Depending on your income bracket, you’ll qualify for a credit of up to 50% of what you spent on child care.
There’s a maximum of $4,000 for one child and $8,000 for two or more children, and they’ll have to be under the age of 13 to qualify.
7. Car expenses
If you’re self-employed and you use your car for business, you can deduct your expenses.
You have two choices: Either report it at a standard mileage rate or tally up your actual expenses.
For 2021, the mileage rate is 56 cents per mile, down a bit since last year.
If you think your expenses are higher than average, it may be worthwhile calculating what you actually paid over the year for your car costs, like your lease, parking fees, repairs and tires.
And don’t forget to add your car insurance, especially if you’re still overpaying for your coverage.
8. Gambling losses
If you’re not a professional gambler, any money you make gambling has to be reported as “other income” in your taxes.
That includes any cash you get from lotteries, raffles, horse races and casinos or the fair market value of prizes like cars or trips.
On the bright side, if you keep a record of your winnings and losses, you can deduct your losses (as long as they don’t exceed the amount of income you report on your return).
Keep in mind that you’ll have to be able to produce receipts, tickets, statements or other records that document your winnings and losses if the IRS requests them.
9. Reinvested dividends
If you invest in mutual funds — whether you use a broker or one of today’s popular investing apps — you probably have it set up to automatically reinvest your dividends.
But every new purchase increases your cost basis in the fund, which reduces your taxable capital gain when you redeem shares.
If you forget to include your reinvested dividends in your basis, you’ll end up paying tax on them twice: Once when they were paid out and then reinvested and the second time when they’re included in the proceeds of the sale.
This one isn’t specifically a deduction, but it can ensure you save a bunch on your taxes every year. If you’re not sure how to handle this on your taxes, ask the fund for help.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
