7 Tax Deductions and Credits That Many People Often Overlook

Whether you love them or despise them, taxes are one of life's only two sure things, at least according to Benjamin Franklin.

But for many, having taxes taken out of their paycheck on a weekly, bi-weekly, or monthly basis is their only form of savings during the year. Although the personal savings rate in the U.S. of 4.2% is off its historic lows, relative to other nations around the world it's pretty low. This means that despite the unpopularity of taxes, they can deliver quite a pop to a number of Americans come February, when tax refunds begin to trickle in.

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Yet for all the different types of tax deductions and credits available, each and every year millions of Americans, even those with the help of tax-prepping software or the assistance of a tax professional, will miss a deduction or credit that they are entitled to. You can blame a lot of this on the tax code, which changes every year, as well as the fact that the U.S. tax code would require nearly 74,000 regular 8.5-by-11-inch printed pages to explain, based on statistics from the CCH Standard Federal Tax Reporter. 

With that in mind, today I want to examine seven commonly overlooked tax deductions and credits that you should be especially on the lookout for when you file your taxes for the previous year on or before April 15. Here they are, in no particular order.

1. Energy-efficient home improvements
Have you ever completed any home-improvement projects that made your home more energy efficient? Perhaps new insulated windows, new doors, or a new roof? The good news is the Non-Business Energy Property Credit allows you to claim up to 10% the cost of these repairs (with windows not to exceed a $200 credit) up to a maximum lifetime credit of $500. In other words, if you claimed $300 on this credit in 2011, you may still claim up to an additional $200, but as the IRS's website warns, be careful to ensure that you have the manufacturer's credit certification statement. Otherwise, the improvement may not qualify.

In addition, the Residential Energy Efficient Property Credit, which runs through 2016, allows you to write off 30% of your costs to put alternative energy equipment in your home, such as solar water heaters or wind turbines. There is no limit on the tax credit you can receive here, and better yet, you can carry the credit forward until it's used up.  

2. Self-employed health insurance premiums
Taxes for self-employed people can be confusing even with the help of tax preparation software -- trust me, I speak from experience -- but one commonly overlooked deduction that self-employed people often miss are health insurance premiums.

For non-self-employed people, health, dental, and other medical expenses need to equate to at least 7.5% of adjusted gross income before they receive any sort of benefit. For practically all self-employed people, this rule doesn't apply. In fact, most won't even need to itemize their deductions, like non-self-employed people. Instead, they can simply deduct all medical and dental expenses paid out of their own pocket in 2013 and reap the rewards of their self-employment.

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3. Casualty, disaster, and theft losses
Have you ever been the victim of a natural disaster such as an earthquake or tornado, or had items stolen from you? If the answer is yes, you may be eligible to claim these different types of losses on your tax return. Also, if you're in a city or county that's been declared a federal disaster area, then you're automatically eligible to claim this loss.

Now keep in mind that not all losses are considered eligible to be claimed on your tax return. If it's a loss that's created by normal wear and tear, you can forget about it! Similarly, if your insurance company provides you with a reimbursement on your loss, the most you can do is claim the difference on the reimbursement value versus what the item was currently valued at (if there's even a discrepancy in the first place).

4. State sales tax deductions
Most people in the U.S. pay a state income tax and get some form of deduction when they file their taxes based on that state income tax. However, in states that have high state sales taxes, or no income tax at all, some people are overlooking the ability to itemize their sales tax deduction for significantly larger savings.

Tax-prepping software that uses pre-determined IRS calculations will often choose a sales tax deduction value based on your income. However, sales tax paid on just a couple of big-ticket items could be enough to tip the scales heavily in favor of itemizing your taxes to claim a much bigger deduction.

5. Caring for a parent
Most people are aware of their ability to claim tax credits for child care, but many often forget that they can also claim a total annual expenses benefit of $3,000 when it comes to taking care of a parent.

According to the IRS, this credit is based on a percentage of the amount of work-related expenses you pay to a caregiver to take care of your parent. The IRS qualifies this Dependent Care Credit as any spouse or dependents who are physically or mentally incapable of taking care of themselves and who spend at least eight hours per day in your household, and the deduction is based on your annual income.

6. Refinancing points
Did you purchase a home or refinance your loan sometime in the past year, or two ... or 10? If you paid points on your mortgage or loan, then you may be entitled to amortize these points over the life of your loan.

For example, let's assume you paid $3,600 in "points" when you purchased your home. Unfortunately, you can't deduct the $3,600 upfront, since those fees were incorporated into the life of your loan. However, you'll be allowed to deduct a maximum of $120 per year on your taxes over the life of the 30-year loan as well as the full balance remaining on your points if you decide to pay off your loan early.

7. Earned Income Tax Credit
Finally, the Earned Income Tax Credit, or EITC, is a benefit given to American workers who have low-to-moderate income, which helps reduce their taxable income and may even result in a refund.

It might seem like common sense for taxpayers to look toward this deduction, since it's been around for years, but the IRS notes that a whopping 20% to 25% of qualified individuals aren't receiving this benefit. One reason, of course, is that you have to file a tax return with the IRS for the EITC even if you owe no tax or aren't normally required to file a return, and we know this probably isn't being done. There are strict limits on who qualifies for the EITC based on their adjusted-gross income, which can be viewed here for 2013.

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  • Report this Comment On January 19, 2014, at 8:00 PM, chainblue wrote:

    This is a good article and should be remembered to do this things fr next year. One thing missing was reducing tax liability by contributing to a SEP IRA and especially a self directed SEP IRA. The contribution limits are raised and there is alot of good information about the self directed ones at http://iracheckbook.com

  • Report this Comment On January 19, 2014, at 11:04 PM, jeepwrangler50 wrote:

    Except for medical deductions, all of the above add up to hundreds of dollars.

  • Report this Comment On January 20, 2014, at 2:31 PM, jdrmonte wrote:

    This is a little late for this year, but if you can afford to pay your second half of home property taxes before January first then this would be a deductible item if you are itemizing deductions. I forgot this last year and it cost me some $. Also, as the article said do not forget about the home loan points. I also forgot about this last year and I could of used the deduction. I do not file long form very often so I missed these. Good luck to all in your income tax journey!

  • Report this Comment On January 20, 2014, at 11:25 PM, coolshoes44 wrote:

    I believe that #2 is misleading. Self-employed people can directly deduct premiums from self-employment income, but any other "medical and dental expenses paid out of pocket" -- including co-payments, services subject to deductible, etc. -- are reported on Schedule A as itemized deductions and are subject to the 7.5% floor. I am 99% sure of this, but I would welcome finding out that I am wrong!

  • Report this Comment On January 21, 2014, at 9:01 AM, J33 wrote:

    To answer the last comment: actually insurance deduction for self-employed is above-the-line deduction which means that it is not deducted on Schedule A where you itemize, but deducted directly on the first page of your tax return. As a result, it is not subject to 7.5 % limitations. When you total all your income items you arrive to your total income, then the adjustments come in. These adjustments include self-employed health insurance, student loan interest, tuition deduction, contributions to traditional IRAs, etc. These deductions reduce your taxable income, so you actually pay taxes on your income minus the above items...

  • Report this Comment On January 21, 2014, at 7:23 PM, lanajh wrote:

    Donating to charity provides donors with tax deductions when filing for taxes every year. Charity work is not only emotionally rewarding for the individual that is doing good, but it is also financially rewarding. A few of my friends got together and collected some items to donate to http://www.collectibleswithcauses.org/ and they were really satisfied with their experience both donating and receiving their files for deductions. This charity really uses everything they receive to help the people that reach out to them for help and anything really helps. This site offers links to their other pages also to donate all sorts of items. Helps others while helping yourself!

  • Report this Comment On January 22, 2014, at 4:23 PM, coolshoes44 wrote:

    @J33 - I understand that. However, my issue was that the article makes it sound like ALL healthcare expenses paid for out of pocket by a self-employed person are deductible. While the above-the-line deduction is helpful, it is for premiums ONLY, not all healthcare-related expenses.

  • Report this Comment On January 23, 2014, at 2:27 PM, apkenn wrote:

    "Instead, they can simply deduct all medical and dental expenses paid out of their own pocket in 2013 and reap the rewards of their self-employment. "

    How does this work?

    IRS PUB 535 only mentions the premiums, not other medical expenses...

  • Report this Comment On January 24, 2014, at 11:45 AM, apkenn wrote:

    There's an important exception to #6. if the purpose of the refi was to free up funds for renovations or repairs for said house, then the entire amount can be taken upfront instead of amortizing.

  • Report this Comment On February 12, 2014, at 2:30 PM, chainblue wrote:

    Wanted to add that a self directed SEP IRA really expands the limits you can contribute. There is a complete information list at http:iracheckbook.com

    But also since I last posted there is a 5 part series on the self directed ira rules and uses you do not even need to go to the site here's the link: https://www.getdrip.com/3205511/campaigns/7806470/subscriber...

    One other note relating to the article is maybe you should look at the entity structure like LLC vs. S-Corp vs. C-Corp, etc. There is more info at www.markbryantcpa.com or ask your CPA. There is no one size fits all, but there are tax savings by matching your type of business with the right legal entity.

  • Report this Comment On March 19, 2014, at 1:24 PM, browny33 wrote:

    I do take every deduction I can, because I don't want the government using more of my money than absolutely necessary to fund programs I don't believe in (welfare for instance). I wish I could tell them where they were allowed to spend it, but since I can't, if I can limit their available funds, I will and use tax refund money for my needs http://creditspoint.com/use-tax-refund-money/

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