Tax season is upon us again, and with it comes a raft of deductions that can save you money and pump up any refund you may get from the Internal Revenue Service. American tax filers claim, on average, just over $5,000 each in deductions every year, according to the Tax Policy Center. But tax experts say we're leaving money on the table, because there are many widely applicable deductions that people fail to claim.
Here are four tax deductions you should be aware of when filing your return this spring.
1. Student loan interest
Student loans can be a sizable expense for families. The good news is that you can claim up to $2,500 in interest paid on qualified student loans for a university, college, or vocational school education. This deduction is available to you if you're paying interest on a student loan for yourself, your spouse, or a dependent child.
To claim this deduction, you must be legally obligated to repay the loan and be making payments on it. In cases where a student and their parents are both legally obligated to repay a loan, the deduction should be claimed by whoever makes the payments. Student loan interest is an "above the line" deduction that you can claim without itemizing, as it is located in the adjusted gross income (AGI) section of Form 1040. Keep in mind, though, that the $2,500 you can deduct gets gradually phased out as your income grows once you're out of school. The phase-out begins when you start earning $60,000 as an individual or $125,000 as a married couple filing jointly.
2. Mortgage interest
Millions of Americans have mortgages, but relatively few choose to deduct their interest payments from their taxable income. And many have a good reason not to: This tax break requires you to itemize your deductions, which prevents you from claiming the standard deduction. And since recent tax reform nearly doubled the standard deduction, most taxpayers are better off claiming that instead of itemizing.
But if you have a sizable mortgage and other major expenses that you can deduct "below the line," then you should consider taking this tax break. Mortgage interest is tax-deductible if the mortgage is for your primary residence or a second home that you don't rent out. Your home must also serve as collateral for the mortgage so that if you fail to make payments, the bank can foreclose on you.
If you've refinanced your mortgage and paid "points," you may be able to deduct those as well. Points are essentially prepaid interest on a mortgage; people pay them up front to get a lower interest rate during the loan repayment period. One point typically equals 1% of the loan amount. Points paid as part of a mortgage refinance usually have to be deducted over the life of the loan, rather than all at once. If you refinanced to a 10-year mortgage, for example, then you'd deduct a portion of the points each year for the duration of the 10-year loan.
3. Social security tax paid by the self-employed
If you're self-employed, you're eligible for a deduction on a portion of the Social Security tax you pay. Every worker must pay Social Security taxes, and if you're self-employed, you need to make these payments yourself, as you don't have an employer to do it for you. For 2018, employees and employers each paid a 6.2% Social Security tax on up to $128,400 of the worker's earnings. But if you were self-employed, you had to pay both the employer's and the employee's share, which amounts to 12.4% on up to $128,400 of earnings.
Fortunately, you can deduct a portion of this amount when you file your tax return. You can claim 50% of what you pay in self-employment tax as an income tax deduction. A $2,000 self-employment tax payment, for example, reduces your taxable income by $1,000. If you're in the 25% tax bracket, you would likely save $250 in income taxes. This deduction is an adjustment to income claimed on Form 1040, and it's available whether or not you itemize your deductions.
4. Professional dues and licensing fees
While the Tax Cuts and Jobs Act eliminated this deduction starting in 2018, you can still claim professional dues and licensing fees incurred prior to last year. And that's good news for people required to pay membership dues or fees required to remain licensed or accredited. This includes everyone from organized laborers paying union membership dues to doctors who pay fees to take licensing exams and remain certified in their area of specialization. Many, though not all, union dues and professional fees are deducted directly from paychecks and appear on T4 slips. However, if you have paid other dues or fees to a union or professional organization, they can be deducted from your taxes up to and including 2017. Many insurance premiums can also be deducted. Doctors, for example, can claim the cost of malpractice insurance when filing their taxes. And the costs associated with passing a certification or licensing exam often qualify as a "tuition expense" in the eyes of the IRS. Be aware, though, that if your employer has reimbursed you for these dues and fees, then they will not be eligible. Also, dues and fees are reported on Schedule A of Form 1040, so if you don't itemize, then you won't be able to claim the deduction.
Filing your taxes can be stressful. But that stress can be alleviated if you have a good understanding of the tax deductions you're eligible to claim. As always, knowledge is power.