Soon, it will be time to file your 2022 tax returns, and advance preparation is important.
To prepare, you can gain an awareness of the tax deductions available to you, regardless of whether you do your own taxes or enlist the help of a professional. You may think a tax accountant will ensure you claim everything properly, but you can’t ever be too sure.
It’s wise to have a baseline grasp of things and, if applicable, make sure your tax accountant takes the time to thoroughly assess your situation. This can help you minimize your tax liability and hold onto your hard-earned cash.
Before we highlight the commonly missed federal tax deductions, let’s take a minute to set the stage.
Claiming the Standard Deduction vs. Itemizing Deductions
Each year, you must choose whether to claim the standard deduction or itemize deductions on your federal tax return. Claiming the standard deduction is the simpler approach but it shouldn’t be done just to minimize the filing effort. Instead, the primary objective should be to minimize your tax obligation.
Ever since the Tax Cuts and Job Act (TCJA) went into effect in 2018, the majority of people benefit the most from claiming the standard deduction, which is $12,950 for individual filers and $25,900 for married filers for 2022. This is largely due to the $10,000 aggregate limit placed on state and local income, sales and property taxes for itemized filers. That said, itemizing still makes a lot of sense for some people — particularly, high-income taxpayers who have a significant amount of deductible expenses.
Most Missed Deductions
Deciding whether to claim the standard deduction or itemize is usually the most significant tax-filing decision you’ll face. As implied above, itemizing usually makes sense when, in aggregate, you incur at least $10,000 on state and local income, sales and property taxes – as well as incur some combination of mortgage interest expense, significant unreimbursed medical expenses and large charitable donations.
The deductibility of these expenses (for itemized filers) is widely known. As a result, they are rarely overlooked by taxpayers, especially those who hire tax professionals.
The commonly missed deductions are less prominent, and they are available to both standard and itemizing filers. In my opinion, the most significant and easily overlooked are as follows:
- Retirement contributions
- Contributions to traditional individual retirement accounts are deductible up to a maximum of $6,000 per year. Income phase-out limits apply.
- Financial losses from the disposal of capital assets
- Investments such as stocks and bonds are deductible to the extent of any realized capital gains. Up to $3,000 of excess capital losses may be deducted against ordinary income. Any remaining losses can be carried forward for utilization in future years.
- Financial losses from disaster and theft
- Generally, you may deduct casualty losses relating to your home, household items and vehicles — if the losses were caused by a federally declared disaster. Theft-related losses must be associated with a crime in the state of occurrence. You may not deduct casualty and theft losses covered by insurance.
- Student loan interest payments
- Student loan interest payments are deductible up to a maximum of $2,500 per year, subject to income phase-out limits. The payments must be related to education expenses for a student (either the taxpayer, a spouse or a dependent) that was enrolled at least part-time at an eligible institution. Prior to 2021, you could also deduct the tuition, fees and related expenses for qualifying higher education expenses. These deductions no longer exist for most filers; however, if you’re self-employed, you have some leeway.
- Self-employed individuals can deduct premiums paid for medical, dental and long-term care insurance. This applies to premiums paid for yourself, your spouse and your dependents. Income phase-out limits apply.
Don’t Forget About Tax Credits
When filing your taxes, don’t forget about tax credits. They are even more valuable than tax deductions, because rather than lowering your taxable income, they directly reduce your tax obligation. A few of the most prominent credits are as follows:
- The American opportunity and lifetime learning credits are education-related credits that can save qualifying individuals thousands of dollars each year.
- The child and dependent care credit can be used to offset the high cost of childcare.
- Credits for various home improvement projects that increase the energy efficiency of your home.
The deductions and credits noted above are only a fraction of the provisions outlined in the Internal Revenue Code. For an exhaustive listing of all that apply to you, an in-depth consultation with a tax professional is recommended.