This has been a difficult year for many Americans, and with everything else that's going on in the world, taxes may be the last thing you want to think about. However, if you haven't already filed your 2020 tax return, the extended deadline of July 15 is fast approaching.
There are many deductions that can reduce what you owe or increase what you have coming back to you -- here are three that you may not be aware of. And if you have already filed this year, keep them in mind for next year's taxes.
1. Medical expenses
To qualify for this tax deduction, the medical expenses of your household (including those of your spouse and dependents) must exceed 7.5% of its annual adjusted gross income. If, for example, you make $75,000 a year and your medical expenses are $7,500, you qualify for the deduction because they exceed 7.5% of your income (in this case, $5,625). One drawback is that in order to claim the deduction, you'll have to itemize the expenses, which means you will have to keep detailed track of all your health-related spending for the year.
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Co-pays to doctors, surgeons, dentists, psychiatrists, and non-traditional doctors, among other practitioners are deductible, as are payments for nursing home or hospital stays. Prescriptions are deductible, but not over-the-counter medicines. Alcohol and drug treatment programs, acupuncture, weight-loss programs (as recommended by a doctor), and smoking-cessation costs (with a prescription) are also eligible. In addition, payments for false teeth, glasses, contact lenses, hearing aids, crutches, wheelchairs, and service animals qualify.
In addition, transportation costs to visit the doctor or hospital are deductible, as are fees and travel costs to attend conferences about ailments or diseases you have. Cosmetic surgeries and treatments are not deductible, nor are our pets' visits to the vet.
Also, you can deduct payments for insurance premiums you paid out of pocket for "policies that cover medical care or for a qualified long-term care insurance policy covering qualified long-term care services." However, it doesn't include the portion of your premiums paid by your employer.
Three key points are important to consider here. First, the amount that is tax deductible is the amount by which your household's medical expenses exceed 7.5% of its income. In the example above, that would be $1,875, not $7,500. Second, those expenses you get reimbursed for -- by your insurer or your employer -- don't count. And finally, next year, the deduction threshold will rise to 10% of your household income.
2. Home office and other deductions for the self-employed
More and more Americans are part of the gig economy, meaning they work as contractors, freelancers, or for themselves and not as a traditional employee of a company. Over the last 10 years, the number of gig workers -- freelancers, contractors -- has grown by 15%, and after the COVID-19 pandemic, that number will likely surge as so many workers were laid off. If you are among this growing number, your office space is deductible as long as it is "regular and exclusive use" as a home office and a "principal place of your business." You can deduct $5 per square foot of office space, up to a total of 300 square feet. Your office supplies and expenses are deductible, too. That means direct expenses, like printers, computers, paper, pens, ink, etc., as well as indirect expenses, like utilities (heat, electricity, etc.) based on the size of your office compared to your home.
There are several other deductions for the self-employed. If you use your car for work to meet with clients, attend meetings, or whatever, you can deduct $0.58 per mile, as well as any repairs, tolls, parking fees, etc. There may also be deductions for work-related education, retirement plan contributions, and healthcare for the self-employed.
3. Student loan interest
If you paid down student loans last year and you make less than $70,000 annually, you qualify for a student loan interest deduction. The IRS allows you deduct up to $2,500 in interest paid on student loans per year. So, if you paid $2,000 in interest on your student loans last year, you can deduct $2,000. If you paid $5,000 in interest, then you can only deduct $2,500. If you're filing as a married couple, the income limit is $140,000. If you make between $70,000 and $85,000 annually (or $140,000 to $170,000 as a married couple), the amount of your deduction is reduced. Beyond $85,000 (or $170,000 for married couples) there is no tax deduction. However, it should be noted that you can't claim the deduction if you file as "married, filing separately."
These three tax deductions may be particularly relevant to those people impacted by economic hardships related to the COVID-19 pandemic. But there are many other tax breaks available to you, so be sure to research all the deductions or consult your tax preparer for all the opportunities.
