If you itemize your tax deductions rather than taking the standard deduction, there are many things you can deduct from your income. We asked four of our Motley Fool contributors for some of the most uncommon tax deductions you may be overlooking.
Matt Frankel: Many people know that you can deduct your state income tax on your Federal return. However, a lot of people don't realize that this deduction is actually a choice between state income tax and state sales tax.
Now, for most people the income tax deduction is much better. However, there are seven states that don't have an income tax (and another two that don't tax wage income), and this is where the sales tax deduction really comes in handy.
This may sound like a tough one to figure out. After all, who actually saves every single receipt and knows exactly how much they paid in sales tax? Fortunately, the IRS understands this and has a calculator you can use to figure out how much you can deduct, based on the state you live in and how much money you make. If you paid sales tax on any big-ticket items (like a car), you can add the amount of sales tax you actually paid to your calculated deduction.
For residents of states without an income tax, this could potentially be worth hundreds of dollars. Even if you live in a state with an income tax, it's worth a quick calculation to see which one is more favorable for you.
Selena Maranjian: You probably know that you can deduct certain medical expenses from your taxable income. You also probably know that you can't deduct them all -- just that portion that exceeds 10% of your adjusted gross income, or AGI, (or 7.5% of AGI for those aged 65 and older). Thus, if your AGI is $65,000 and you're 50 years old, you can deduct the portion of your qualifying medical expenses that exceed $6,500. If they total $10,000, you can deduct $3,500. Got it?
Here's the aspect of this deduction that's commonly overlooked: There are a wide range of qualifying medical expenses. Yes, expenses such as tooth-whitening, gym membership fees, cosmetic surgery, and hair removal (or hair transplants) are disallowed. But you might be surprised at what does make the list: Wheelchairs, eye exams and glasses, oxygen, vision correction surgery, hearing aids, fertility enhancement, artificial limbs, acupuncture, Braille books and magazines, crutches, false teeth, home improvements made for health-related reasons (such as lowering cabinets or building an access ramp), and even lead-based paint removal.
The cost of acquiring, training, and supporting a service animal such as a guide dog is deductible. Reasonable lodging expenses associated with receiving medical care -- such as if you have to travel a considerable distance to get to a certain doctor or medical facility -- are also allowed. You can also deduct travel and admission expenses if you attend a medical conference related to a chronic illness suffered by you, your spouse, or a dependent. The cost of smoking-cessation programs (but not products such as nicotine gum) is deductible, too.
Spend a little time reviewing the whole list of allowed deductions and their associated rules and jot down your qualifying expenses. You might be surprised and find yourself above the 10% or 7.5% threshold.
Dan Dzombak: One uncommon tax deduction you may be overlooking is the educational expenses deduction. This is uncommon because it only includes educational expenses related to your current job and does not apply to traditional college students.
You can only include educational expenses that either maintain or improve your skills for your current job, or educational expenses required to keep your salary, status, or job. Deductible expenses include tuition, books, supplies, lab fees, transportation costs, and other similar items.
It is important to note that you cannot deduct educational expenses that are not related to your current job, even if they will qualify you for a new job. If this is your situation and if you are single and make under $62,000 or married filing jointly and make under $124,000 as a couple, take a look at the Lifetime Learning Credit which allows you to claim as a tax credit 20% of qualified education expenses, up to a maximum $2,000 tax credit.
Dan Caplinger: Many investors don't realize that some of their expenses are deductible on their tax returns. That's because in many cases, taxpayers don't have enough expenses to warrant a deduction, but it's still worth checking out.
Investors benefit from two favorable tax provisions. First, you can write off any investment interest you pay on a loan that you borrow for investment purposes. So for instance, if you take out a broker margin loan and buy stock with the proceeds, then the interest on your margin loan is deductible as investment interest. You can only deduct as much interest as you earn in investment income, but you can carry forward any extra amount to future years.
Secondly, you can often deduct investment expenses as a miscellaneous itemized deduction. Those expenses include not only mutual fund management fees but also annual brokerage account fees, financial newspaper and magazine subscriptions, software costs for investment management, and even the transportation to and from your broker's office. However, these miscellaneous itemized deductions are only deductible to the extent that they exceed 2% of your adjusted gross income. In many cases, that income limit wipes out the effectiveness of the deduction, but for some, it still produces some benefit.