5 overlooked tax deductions
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Tax season can be a stressful time for many families. If you anticipate paying additional taxes, you may not know exactly how much you owe until you file.
Surprisingly, many people end up paying much more than they need to because they don’t take advantage of all of the available tax deductions.
1. State sales tax
If you live in a state that doesn’t have an income tax, this is a great write-off to take advantage of. You have the option to either deduct state and local sales taxes or state and local income taxes.
For most families in this situation, deducting income tax is the better option. How much you can deduct will depend on the state you live in and your income level, but the IRS has a helpful calculator you can use to figure out the deduction. If you purchased a car, washing machine, etc., you can deduct the sales tax, up to the limit of the state’s general sales tax rate.
2. Medical expenses
If you or a member of your family has had major medical expenses over the past year, these expenses can be used to reduce your tax burden.
Keep in mind that you can only deduct medical expenses if they amount to more than 10 percent of your family’s adjusted gross income.
For most families, this means the medical costs would have to be fairly significant, but if someone lost their job or got a dramatic pay decrease, it’s much easier for medical expenses to reach the 10 percent requirement.
To make the most of claiming these expenses, make sure you pay any medical bills before Jan. 1 so they count toward the year’s taxes.
3. Earned Income Tax Credit (EITC)
Many lower-income families qualify for the Earned Income Tax Credit (EITC), but according to the IRS, 25 percent of taxpayers who are eligible don’t claim it.
Some aren’t aware of it while others fail to take advantage of the EITC because the rules are complicated.
The EITC isn’t a deduction but a refundable tax credit designed to supplement lower-income workers. For 2015, it ranges from $503 to $6,242.
The tax credit doesn’t only apply to low-income workers. It also includes families that have suffered recent financial hardship such as losing a job, getting a pay cut or losing hours at work.
How much you receive will depend on your income, family size and marital status. Even if you don’t owe any taxes this year, you must file a tax return to received the credit. Check with the IRS to see if you qualify for the EITC.
The good news about EITC is that if you failed to claim it when you were eligible, you can file any time throughout the year to claim it (for up to three previous tax years).
4. Tax and legal expenses
The IRS considers expenses that are necessary for the regular operation of your business to be tax deductible. This includes any fees paid to your business lawyers, consultants or accountants during the tax year. One exception is legal fees paid in order to acquire business assets.
Several other similar areas are also tax deductible, such as fees paid for tax preparation the previous year, licensing or regulatory fees paid to the government (such as for a car), and expenses related to the education and training of employees.
5. Auto expenses
If you use your car in any way for business, you can deduct some of the costs of operation and maintenance even if you use it for both business and personal driving. There are two ways you can claim a deduction for auto expenses:
Use the IRS standard mileage rate and multiply it by each mile your car was used for business. For 2015, it’s 57.5 cents per mile.
Determine your actual car expenses for the year, including gas, tolls, lease payments, oil, repair and maintenance, insurance, parking fees and registration.
To calculate the deduction on a vehicle used for business and personal purposes, just divide your expenses by the mileage used for each.
Do you know of any other deductions that can help families save during tax season?
Troy Martin is a shareholder at Cook Martin Poulson, an accounting firm. He has a vast amount of experience in the following business sectors: medical, dental, manufacturing, retail, restaurants, construction, farming and ranching.