All too often, we see people missing out on great tax-saving opportunities because they simply don’t know about them. And with tax laws changing every year, it’s not always easy to keep up with the latest tax deductions, credits, and exemptions.
Our list of frequently missed tax breaks may help you uncover money-saving opportunities this tax year.
Out-of-pocket charitable deductions
You’ve likely taken note of the big charitable gifts you made during the year, but the little things add up too. Did you know that you can write off out-of-pocket costs incurred while doing work for a charity? For example, ingredients for cakes you prepare for a nonprofit organization’s bake sale, or materials you bought for a school’s fund-raising car wash count as charitable contributions. If you drove your car for charity work, you can deduct tolls, parking, and the mileage rate.
- Keep your receipts
- If your contribution comes to more than $250, you’ll need an acknowledgment from the charity documenting your support
If you’re making big gifts across multiple years, consider whether bunching your donations may offer benefits, especially if you’re close to itemizing. A donor-advised fund is also a powerful tool for planning charitable giving in a way that maximizes the tax benefits.
State sales taxes
Those who itemize can choose between deducting the state and local sales taxes or state income taxes, whichever option saves the most money. So, if you live in a state that doesn’t impose a state income tax, the sales tax write-off is the obvious choice.
You can use the IRS’ calculator to show how much you can deduct. This amount is based on your income, state, and local sales tax rates. Your total sales tax deduction amount will also include the tax paid on big-ticket items.
But, remember, the write-off for sales tax is added to your local property taxes, and the maximum combined total of these taxes is $10,000 per year for joint filers, or $5,000 if you’re married but filing separately. This limit is commonly referred to as the SALT (state and local taxes) deduction cap.
State tax paid for the previous year
Did you owe tax when you filed last year’s state income tax return? If so, remember to include the amount in your state-tax deduction on your 2021 federal return. You can also include state income taxes withheld from your paychecks or paid via quarterly estimated payments during the year.
As mentioned above, the deduction for state and local taxes is limited to $10,000 a year ($5,000 for individuals and married couples filing separately).
Are you unnecessarily reporting a state income tax refund?
You’ll find a line on the tax form for reporting a state income tax refund. However, most people claim the standard deduction on their previous federal returns, which means that the state tax refund is tax-free.
If you itemize, you might be able to deduct your gambling losses, which include casino or racetrack losses, as well as non-winning bingo, lottery, and raffle tickets. The amount is limited to the gambling winnings you report as taxable income.
If you plan to use this deduction, be sure to keep all your gambling receipts, including losing tickets. The IRS also suggests that you keep a daily diary of gambling activity, detailing:
- The date and type of wagering
- Names of people with you when you gambled
- Name and location of the gambling establishments
- Amounts you won or lost
Many employers continue to pay their employees’ full salaries while they serve on jury duty, with the clause that employees must then turn over their jury pay to the company. If this is the case for you, remember that the IRS demands that you report jury fees as taxable income. If jury fees have been paid back to your employer, you need to deduct this amount to even things out.
Social Security taxes paid by you
If you’re self-employed and pay the full 15.3% Social Security and Medicare tax (instead of splitting it with an employer), you get to write off half of what you pay—without having to itemize to take advantage of this deduction.
When you refinance a house, you generally deduct the points on the new loan over the life of that loan. For example, with a 30-year mortgage, you can deduct 1/30th of the points each year. And if you use part of the refinanced loan to improve your home, you might be able to deduct points related to the home improvements right away. In the year the loan is paid off, you get to deduct all the points you haven’t deducted yet—either by selling the house or refinancing.
There is an exception to this rule: If you use the same lender to refinance a refinanced loan, you’ll have to add the points you paid on the latest deal to the leftovers from the previous refinancing, then deduct the amount over the life of the new loan.
Private school tuition (K-12)
In some states, you can pay your child’s private school bill from savings accounts normally used for college tuition. You can take a tax-free distribution from your 529 savings plan of up to $10,000 per student per year. This amount can be used to pay tuition for kindergarten to 12th grade at a private school. Although tuition can be paid from multiple 529 plan accounts, the total amount can’t exceed the total annual limit.
Student loan interest paid by parents
If a parent pays back a child’s student loans, the IRS treats the transactions as if the money were given to the child, who then paid the debt. Children can deduct up to $2,500 of student loan interest paid by their parents each year (as long as they are no longer claimed as dependents). The child won’t have to itemize to take this deduction.
Self-employed healthcare premium deductions
If you are self-employed and not eligible for any employer-sponsored health insurance through another job or your spouse’s job, you can deduct health insurance premiums for yourself and your family.
If you continue to run your business after qualifying for Medicare, you can deduct the following health insurance premiums:
- Medicare Part B and Part D
- Supplemental Medicare (Medigap) policies
- Medicare Advantage plan
Military reservists’ travel expenses
Members of military reserves or the National Guard may write off the cost of travel to drills or meetings. Eligible costs include lodging, half the cost of your meals, parking and toll fees, and an allowance for driving your own car. To qualify for this deduction, you must travel more than 100 miles from home and be away from home overnight.
Amortizing bond premiums
If you purchased a taxable bond for more than its face value, the IRS will effectively help you pay that premium (since they are going to tax the extra interest that the higher yield produces anyway).
You have two choices on how to handle the bond premium:
- Amortize the premium over the life of the bond: Take each year’s share of the premium, and then subtract it from the amount of taxable interest from the bond you report on your tax return. You also reduce your bond’s tax basis by the amount of that year’s amortization.
- Ignore the premium until you redeem the bond: The full premium will be included in your tax basis, increasing the taxable loss or reducing the taxable gain.
Let us help you optimize your tax deductions in 2022
We hope this article helped you identify some 2022 tax deductions relevant to you. Please be aware that this is by no means an exhaustive list, so if you want to take the guessing game out of securing the appropriate tax deductions, schedule a consultation with a trusted advisor.