With tax time coming up, many Americans are scrambling to maximize their tax refunds or lower their tax bills. With that in mind, here are two deductions you may not already know about, and one that you can still take advantage of -- even though 2016 ended more than three months ago. The best part is that all three are above-the-line deductions, so you can take advantage of them even if you don't itemize on your tax return.
An education tax break you may not know about
It's common knowledge (especially among college students and their parents) that there are tax breaks available for tuition and fees. The American Opportunity Credit, Lifetime Learning Credit, and tuition and fees deductions are all designed to help make paying for college a little more affordable.
However, a recent survey found that about one-fourth of student loan borrowers didn't know that the interest they pay on their student loans is deductible. Even better, it is an "above-the-line" deduction, meaning that you can use it even if you don't itemize deductions on your tax return.
For the 2016 and 2017 tax years, borrowers can deduct up to $2,500 per year, per person, of interest paid on qualifying student loans. Here's a complete discussion of the rules and restrictions, but this can be a pretty lucrative tax break. As an example, if you pay over $2,500 in annual student loan interest and are in the 25% tax bracket, this can put up to $625 back in your pocket at tax time, every year.
To take full advantage of the deduction on your 2016 tax return, your modified adjusted gross income (MAGI) needs to be less than $65,000 for single taxpayers, or $130,000 for married taxpayers filing jointly. A partial deduction is available for people who exceed these MAGI thresholds but don't exceed $80,000 (single) or $160,000 (married).
Did you move in 2016?
Another deduction many people aren't aware of is the moving expenses deduction. If your move was related to the start of a new job, your expenses incurred during the move can be deducted.
One thing to remember is that you don't necessarily have to have a job lined up before you move in order to qualify. Rather, the move needs to pass two IRS "tests" to qualify -- time and distance. The time test is straightforward. You need to work full-time for 39 weeks during the 12-month period immediately following the move.
The distance test is a bit more complicated. The IRS wording states, "Your move will meet the distance test if your new main job location is at least 50 miles farther from your former home than your old main job location was from your former home."
This can be confusing, so here's an example that helps clarify the distance test. Let's say that your old home was 10 miles away from your old job, and that your new job is 75 miles away from your old home. The difference between these two distances is more than 50 miles, so the move passes the distance test.
If you qualify, you can deduct the reasonable costs of moving your personal property, as well as travel expenses to get to your new home. This can include hiring movers, shipping your car(s), a per-mile deduction if you drive to your new home, and lodging expenses on the way. Here's a complete guide to what is and is not deductible.
Just like the student loan interest deduction, the moving expense deduction is an above-the-line deduction, so you can use it even if you don't itemize. If your move meets the IRS definition of a work-related move, this tax break alone could put hundreds, or even thousands, of dollars back in your pocket.
The best tax break of all?
Finally, I've written before that the tax breaks available for retirement saving are the best tax breaks of all. Not only can you boost your tax refund every year, but you'll build up a nest egg in the process and greatly improve your quality of life after you retire.
All forms of retirement accounts offer great tax benefits, but a traditional IRA is one that you can get a tax deduction for every year, so that's what I'll focus on. You can't deduct Roth IRA contributions, but those accounts have several excellent advantages, which you can read about here.
Traditional IRA contributions may qualify for an above-the-line tax deduction depending on your income and whether you can participate in a retirement plan through an employer or not. If you qualify, you can contribute up to $5,500 to an IRA in 2017 ($6,500 if you're 50 or older), so this can be a pretty large deduction. In fact, if you're in the 25% tax bracket and are over 50, this translates to as much as $1,625 added to your tax refund, just for saving for your retirement. In addition, if you're married and earn less than $62,000 in 2017, or $31,000 if you're single, you may qualify for the Saver's Credit on top of the other tax benefits.
Additionally, this is a rare tax break that you can take advantage of after the year ends. Tax-deductible IRA contributions can be made all the way up until the tax deadline, so you have until April 18, 2017 to take advantage of this on your 2016 tax return.