The Top 5 Tax Deductions You May Be Overlooking
If there's one thing all Americans can agree on, it's that the less income tax you have to pay, the better. Thankfully, the IRS offers a number of deductions that can reduce your taxable income and help you keep more of your hard-earned money for yourself. Here are five in particular that you may have missed.
1. Medical expenses
Though not everyone spends enough on healthcare to deduct medical expenses, if your out-of-pocket costs for the year exceed 10% of your adjusted gross income (AGI), you can write off that excess on your tax return. When calculating your expenses, it's not just prescription costs and co-pays you should factor in; you can also include travel costs to and from appointments and lodging. If, for example, you have a weekly appointment with a physical therapist and must pay $15 to park your car down the street, that cost is deductible. Along these lines, you can also deduct reasonable lodging expenses associated with medical treatment -- meaning, if you go out of town to see a specialist, you can write off your hotel stay.
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When figuring your deduction, remember that you're only looking at expenses that equal more than 10% of your AGI. If, for instance, your AGI is $50,000 and you spend $5,500 in eligible expenses, your deduction will be $500, not $5,500.
2. Health insurance premiums
Many tax filers can't take advantage of the medical expense deduction because the IRS sets a pretty high spending threshold for eligibility. But if you're self-employed and therefore responsible for purchasing your own health insurance, you can deduct the cost of your premiums even if your total out-of-pocket medical costs don't reach or exceed 10% of your AGI. You can also deduct the cost of securing coverage for your spouse and dependents.
3. Moving expenses
If you move not only for a change of scenery but for a new job, you may be eligible to deduct the costs involved if you meet the right criteria. First, the distance between your old home and new job must be at least 50 miles greater than the distance between your old home and previous job. So if, for example, you used to commute 30 miles each way to work and find a new job that would entail an 80-mile commute, you can move closer to your new place of employment and fulfill the distance requirement. Additionally, you must work at your new job for at least 39 weeks during the one-year period following your move. Assuming you meet these requirements, you can deduct costs such as hiring movers, renting a van, and paying for storage.
4. Home repairs
Repairs are an inevitable homeownership expense. But if you're self-employed and are eligible for the home office deduction, you can also write off a portion of your home repair costs, whether it's hiring roofers to fix a leak or bringing in an HVAC company to rework your central air. To calculate your deduction, you'll need to figure out how much space your office takes up relative to the rest of your home and write off your repair costs proportionately. If, for example, you have a 200-square-foot office and a 2,000-square-foot home, you can deduct 10% of whatever repair bills you're forced to cover.
5. Job search costs
Whether you've been laid off or are looking for a change, the expenses you rack up in pursuit of new employment could be tax-deductible if you meet certain criteria. First, you can't be looking for your first job out of college; rather, you need some sort of employment history to qualify. Additionally, you must be looking for work within your established field (if you're a lawyer looking to pursue your goal of teaching high school drama, you're out of luck).
Provided you're eligible, you can deduct any job search expenses you incur that exceed 2% of your AGI. These include hiring a resume service and traveling to and from job interviews.
Deductions serve the very important purpose of exempting part of your income from taxes. If your effective tax rate is 25% and you have $15,000 in eligible deductions, you'll lower your tax bill by $3,750. It therefore pays to research these and other lesser-known deductions to maximize your tax savings going forward.
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