Overlooked Tax Deductions and Tax Credits Can Reduce Your Tax Bill

Don’t Overlook These Six Deductions When You File Your 2019 Taxes

Tax day is coming soon. Make sure you take all the tax credits and tax deductions you can to keep more of your hard-earned money.

We list below some tax credits and tax deductions that many people overlook.

Overlooked Tax Deductions

Tax Credit vs. Below-the-line Tax Deduction vs. Above-the-Line Deductions

You subtract a tax credit directly from your tax liability. This deduction gives you a dollar for dollar reduction in taxes. You can take a tax credit even if you do not itemize.

With a tax deduction, you lower your tax liability by subtracting the deduction from your taxable income. The deduction indirectly lowers your taxes by lowering your income. The value of a deduction to you depends on your tax rate. If you take the standard deduction, you cannot take below-the-line deductions.

The line, essentially, refers to your adjusted gross income (AGI). The IRS calculates your taxes based on your AGI. You subtract above-the-line deductions from your taxable income before you arrive at your final AGI. You subtract below-the-line deductions after you determine your AGI.

You can take above-the-line deductions even if you take the standard deduction. Above-the-Line deductions include:

  • IRA and HSA deductions
  • Student loan interest deduction
  • Educator expense deduction
  • Certain self-employment deductions
  • Alimony deduction
  • Moving expenses for armed forces deduction

Tax Credits and Tax Deductions Some Filers Overlook

1. Student Loan Interest (above-the-line tax deduction)

For many families, student loans are a huge expense. Here’s a deduction that helps you reduce that expense. You can claim up to $2,500 in interest you pay on a qualified student loan. The IRS allows this deduction for student loans for attending a university, college, community college, or vocational school. Taxpayers who pay interest on student loans for themselves, their spouse or a dependent child, can take this deduction.

To be eligible for this deduction, you must be legally obligated to repay the loan and you must be making payments on the loan. If the loan designates you and your child as legally obligated to repay the loan, the individual making the payments should claim this deduction.

While the max you can deduct is $2,500, the IRS phases out the allowable deduction as your income increases once you have left school. The phase-out starts when you earn $60,000 as an individual or $125,000 as a married couple.

2. Social Security paid by self-employed (above-the-line tax deduction)

Many self-employed individuals commonly overlook this deduction.

While workers for a company only pay 6.2% social security tax (for income up to $128,400), a self-employed person pays twice that amount. Self-employed folks must pay their side of social security taxes and the employer’s side of social security. It’s a big tax hit for many.

The IRS allows you to deduct a portion of this double tax.  The agency permits self-employed filers to deduct 50% self-employment tax as a tax deduction

3. Medical insurance paid by self-employed (above-the-line tax deduction)

If you are self-employed, here’s another nifty deduction. If you qualify, you can deduct 100% of your health insurance premiums for you, your spouse and your dependents.

This deduction applies to premiums for health insurance, dental insurance, and long-term care.

You can apply this deduction to your personal federal, state and local taxes. You record this deduction on Schedule 1.

To qualify for this deduction you must:

  • Have a business income. IRS regs only allow you to deduct as much as you earn from your business.
  • Have no other medical coverage. The agency does not allow you to take the self-employed medical deduction if you are eligible for coverage by your employer or your spouse’s employer.

Who is self-employed?

The IRS considers you self-employed if you own “an unincorporated business.”

In most instances, you are an owner of an “unincorporated businesses” if you operate as a:

  • Independent contractor
  • Freelancer/ gig worker (working for different businesses or individuals)
  • Owner of an online business
  • Sole proprietor
  • Sole owner of or partner in an LLC
  • Member of a partnership
  • Owner of an S corporation (2% or more)

4. Dependent care credit (tax credit)

For many families, childcare is a substantial cost. To help families with dependents, the federal government offers the Child and Dependent Care Credit. This is a very valuable tax credit, which covers up to $3,000 spent on childcare for one child or qualifying dependent (and up to $6,000 for two qualifying dependents.) The IRS bases a family’s allowable child credit on the parents’ adjusted gross income.

Qualifying dependents include:

  • A dependent child who was under age 13 when the care was provided,
  • Your spouse who was physically or mentally incapable of self-care and lived with you for more than half of the year, or
  • An individual who was physically or mentally incapable of self-care (with some restrictions) 

You can read more about this credit at this link.

5. Lifetime learning payback (tax credit)

Many people think of young folks heading to college when anyone mentions higher education tax credits. Here’s a credit that helps undergraduates, graduates, and students taking professional degree courses to improve their job skills.

Taxpayers can take this credit as long as they qualify (no limitation in years). The credit is worth up to $2,000 and does phase out as the taxpayer’s income increases.

You can read about eligibility and income requirements at this link.

6. Larger standard deduction for older or blind filers

With the changes in the Tax Cuts and Jobs Act (TCJA), most filers just claim the standard deductions. If you are age 65 or older, or visually impaired, the IRS may allow you to increase your standard deduction by $1,650 or more.

If you qualify for this deduction, the IRS introduced a new form this year 1040-SR. You can read more about the qualifications at this link or view a copy of 1040-R at this link.

If you have any questions about filing your 2019 taxes, please contact us.

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