Common Overlooked Tax Deductions And Credits

by TK on March 25, 2021

It’s that time of the year again, the time to do taxes.  Here are some of the most-often missed federal tax deductions (and credits).

1) Mortgage interest are deductible.  You cannot deduct the amount paid, but just the interest.  There is a limit on the loan amount that you can deduct though.   The number changes yearly but it is just in excess of $1 million.  You can also deduct points paid as a result of refinancing.

2) Student loans.  You are allowed to deduct up to thousands each year in student loan interest.  That’s right, you can only deduct the interest paid on the student loan.  It doesn’t matter who paid for the loan, even if it your parents paid the student loan for you.  It is you who can deduct the loan, not them.  That is because the legal obligation is for you to pay the loan back, because it is in your name.  If the loan was in your parent’s name, then that is a different matter.

3) Child care tax credit.  If you have child care, you can get between 20-35% of the child care fees as a credit, depending on your adjusted gross income.

4) American Opportunity Tax Credit is the tax credit that replaced the HOPE Credit in 2011.  It allows you to get up to $2,500 in tax credits for expenses during the first four years of post-secondary schooling.  The HOPE Credit only allowed a credit for the first two years of post-secondary schooling.  Either the student or the parent can claim the tax credit, but not both.  Your gross income cannot exceed $80,000 for a single taxpayer or $160,000 if married.  To claim the credit, use Form 8863.  If you are in post-graduate studies, you can take a look at the Lifetime Learning Credit.

5) If you have to take care of a parent, you can deduct that.  This is because your parent then qualifies to be your dependent.  In-home care and nursing home care can be deducted using Form 2441.  A care provider will need to either provide you with a 1099 or a W-2 in order to qualify though.

6) If you are paying alimony, that is tax-deductible.  However, property settlements, child support, or lump-sum alimony payments are not deductible.  You can deduct it on Form 1040.

7) Medical and dental expenses are tax deductible as long as they are over 7.5% of your adjust gross income.  For instance, if your adjust gross income (AGI) is $80,000 and your total medical and dental expenses $10,000, you can only claim a deduction of $4,000 (because the other $6,000 is 7.5% of your adjusted gross income).  These are expenses that are paid out of pocket by you, not the amount that is billed to your insurance company.

Child Tax Credit was set to expire but President Obama extended it to 2012.  The Child Tax Credit effectively gives you a $1,000 tax credit for dependent children under 17 (by the end of the tax year).  This is a non-refundable tax credit so if the credit is more than the amount you owe in taxes, then you are not eligible to take the credit.  If that is your case, then you can take the  Additional Child Tax Credit.  In order to take the Child Tax Credit, your adjusted gross income must be below $75,000.  If you are married and filing jointly, you must make less than $110,000.  If you are married and filing separately, then your income must be under $55,000.  However, if the child is in a family that makes less than $130,000 a year, the parents are still allowed to take a partial credit.  To qualify you must pass the relationship test, the support test, the dependent test, the citizenship test, and the residence test.  To find out more about these tests, go to the IRS site.

A Reminder About Deductions And Credits

Remember, when you are given the oppurtunity on your taxes to choose a deduction or a credit, (almost) always choose a credit.  A credit is a dollar-for-dollar refund on your taxes.  A deduction is not.  So a $2,500 tax credit is $2,500 towards your tax refund.  A $2,500 deduction can mean $70 towards.

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