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Taxpayers Overlook These 10 Deductions That Could Save Thousands

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By Alessia Barranca

Frugal Feature

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Tax season can be daunting, but it’s also an opportunity to get some money back from the government. While everyone knows about standard deductions and mortgage interest, many lesser-known tax breaks could significantly reduce your tax bill. Here are the top 10 overlooked tax deductions authorized by the IRS that could save you thousands:

Charitable Contributions

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Charitable donations can be tax deductible in the U.S. if you meet specific requirements. First, the donation recipient must be a qualified charitable organization. Second, you can only claim charitable deductions if you itemize deductions on your tax return. The standard deduction amount might be higher than your total itemized deductions, so do the math to see which option benefits you most. Charitable donations can include cash donations, the fair market value of donated clothing and household goods, and even mileage-driven volunteer work.

Student Loan Interest

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If you’re paying off student loans, you can deduct up to $2,500 of the interest you paid in the tax year. Generally, the loans need to be qualified student loans used for higher education expenses, and your income must fall below a certain threshold. Typically, you receive a Form 1098-E from your loan servicer that shows the amount of interest you paid during the year, and the deduction can significantly impact your finances.

Energy Efficient Improvements

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Eco-friendly homeowners may qualify for tax credits to offset the cost of certain energy-efficient upgrades. Nonbusiness Energy Property Credit is usually a one-time credit that lets you deduct a percentage of the cost of specific energy-efficient improvements, such as new windows, doors, insulation, and some geothermal heat pumps.

Child and Dependent Care Credit

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The Child and Dependent Care Credit is a tax credit that aids in balancing the cost of childcare for working families in the U.S. It’s not a deduction, which reduces your taxable income, but a credit that directly reduces your tax bill. Generally, you can include daycare center fees, nanny wages, before and after-school programs, and summer camps in your qualifying expenses.

Earned Income Tax Credit (EITC)

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This refundable tax credit is available to low—and moderate-income workers and can significantly decrease your tax bill or even result in a tax refund. In 2024, the maximum income limit is $63,398, and the investment should be below $11,600. The figures may vary if you have qualifying children and are married, so it is best to contact the IRS.

State and Local Taxes Paid

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You can deduct your state and local income taxes (SALT) or your state and local sales taxes paid, but not both. The higher amount can be claimed as an itemized deduction on your tax return. Depending on your income bracket, the total state and local income tax you pay might be substantial, so it is worth looking into.

Refinancing Mortgage Points

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If you refinanced your mortgage in the past year, the points you paid can be deducted in full on your tax return. Points are prepaid interest on your mortgage. You pay a certain percentage of the loan amount upfront in exchange for a lower interest rate over the life of the loan, with one point equaling 1% of the loan amount.

Jury Duty Pay Paid to Employer

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If your employer continues your regular salary while you’re on jury duty, that payment is considered ordinary income. It’s taxed like your regular wages and is reported on your W-2 form. Since it’s income, you can’t deduct it. The critical difference is between employer-provided salary and court-awarded “loss of earnings.” If you don’t receive regular pay during jury duty and instead claim a loss of earnings allowance from the court, that allowance might be tax-exempt, depending on your location.

Out-of-Pocket Medical Expenses

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You can deduct the excess amount if your out-of-pocket medical and dental expenses exceed 7.5% of your Adjusted Gross Income (AGI) in 2023. This can include expenses like health insurance premiums, co-pays, and prescriptions. You can only claim the deduction if you itemize deductions on your tax return. This means listing out all your deductible expenses instead of taking the standard deduction the IRS offers. Generally, itemizing only makes sense if your total itemized deductions exceed the standard deduction.

Gambling Losses (Up to Winnings)

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Believe it or not, you can deduct gambling losses, but only up to the amount of your gambling winnings. You will need to keep good records of both your wins and losses throughout the year, and similar to medical expenses, you can only claim this deduction if you itemize deductions on your tax return. For example, if you win $1,000 gambling but lose $1,500, you can only deduct $1,000 in gambling losses on your tax return. However, if gambling is your primary source of income, consult a tax professional for advice on how your situation is handled.