Commonly Forgotten Tax Deductions
Reading Time: 4 minutes
By Ian Bin
It’s that time of year again when we all become amateur accountants, combing through receipts and financial statements, hoping to maximize our returns. But let’s face it: tax code can be as complex as a labyrinth, and it’s all too easy to miss a turn that could lead to extra cash in your pocket. That’s why we’re here to highlight the most overlooked tax deductions that might be your hidden treasure. Whether you’re a seasoned tax filer or a novice navigating your first return, this blog is your map to uncovering deductions that often fly under the radar.
And of course it must said: While we strive to provide accurate and helpful information, we are not tax advisors, nor do we know your specific situation. We strongly recommend consulting a professional tax advisor or accountant to ensure accuracy and compliance with all relevant regulations and requirements.
State Income Tax Refund
There’s a line on Schedule A of IRS Form 1040 for reporting a state income tax refund.1 However, this can be confusing because most taxpayers who receive state tax refunds are not required to register them on their federal income tax return. If you claimed the standard deduction for state and local taxes on your most recent federal tax return, your state tax refund is not taxable.2 The majority of taxpayers opt for the standard deduction. Therefore, if you did not itemize deductions in the year you received the state income tax refund, you should not report the refund as income.
State Tax Paid for Previous Year
If you owed taxes when you filed your previous year’s state income tax return, you can include that amount in your state tax deduction on your current federal return. This includes state income taxes withheld from your paychecks or paid through quarterly estimated payments.3 Remember that the state and local tax deduction is capped at $10,000 per year ($5,000 if married filing separately).3
State Sales Taxes
Residents of states without an income tax, listen up! If you itemize deductions, you can deduct either state income taxes or state and local sales taxes, whatever saves you more money.4 The sales tax deduction will likely be more substantial for those in states without an income tax. However, if you reside in a state with income tax and make significant purchases (like a car or boat), your sales tax could be higher. The IRS provides a calculator to help determine the best option for you here.
Out-of-Pocket Charitable Contributions
It’s easy to remember to claim extensive checks or consistent payroll deductions as charitable contributions. However, more minor out-of-pocket expenses can accumulate. These include costs incurred while working for a charity, such as ingredients for a nonprofit soup kitchen or postage for a school fundraiser. Keep your receipts: If your contributions total $250 or more, you’ll need an acknowledgment from the charity.5 Additionally, if you drove your car for charity during the year, you can deduct 14 cents per mile, plus any parking and toll fees paid.6
Refinancing Points
The points paid to secure a mortgage when buying a house are deductible.7 However, when refinancing, you must generally amortize the deduction of the points over the life of the new loan. This equates to a deduction of 1/30th of the points yearly on a 30-year mortgage.8 If part of the refinanced loan is used for home improvements, you can deduct the points related to those improvements immediately. Otherwise, the remaining points are deducted over the life of the loan.8 When you pay off the loan (e.g., through sale or refinancing), you can remove all remaining points that were not deducted. Note: If you refinance with the same lender, combine the points from the new loan with any remaining points that were not deducted from the previous refinancing and amortize over the new loan’s life.9
Student Loan Interest Paid by a Parent
The interest is only deductible if you are legally obligated to repay the debt. However, if parents pay their child’s student loans, the IRS treats it like the child received the money and repaid the debt.10 Thus, if the child is not claimed as a dependent, they can deduct up to $2,500 of student loan interest paid by their parents each year without needing to itemize deductions.10
Gambling Losses
To benefit from gambling loss deductions, you must itemize, and the deduction is limited to the amount of gambling winnings reported as taxable income.11 This also includes the cost of non-winning bingo, lottery, and raffle tickets. Keep all gambling receipts and consider maintaining a daily diary of gambling activities, including dates, types of wagers, names, and locations of gambling establishments, companions present, and amounts won or lost.12
Jury Pay Given to Employer
Many employers continue to pay total salaries to employees serving on jury duty, stipulating that the employee hands over any jury pay received to the employer. While the IRS requires you to report jury pay as income, you can deduct any jury pay you returned to your employer.13
Stay Ahead with Tax Deductions Many Miss
And there you have it—your guided tour through the maze of tax deductions many people overlook. As we wrap up, remember that taxes aren’t just about paying your dues and seizing opportunities to save by staying informed and vigilant. While we’ve highlighted some of the commonly missed deductions, always keep an eye out for changes in tax laws and tailor your deductions to your unique situation.
Resources
1 “About Schedule A (Form 1040), Itemized Deductions.” Internal Revenue Service, www.irs.gov/forms-pubs/about-schedule-a-form-1040. Accessed 23 Jan. 2024.
2 2H&R Block. “Is My State Refund Taxable Income If I Itemized My Federal Tax Return?” H&R Block, 5 Aug. 2021, www.hrblock.com/tax-center/filing/adjustments-and-deductions/is-a-state-refund-taxable/.
3 Rosen, Andy. “Salt Deduction 2023: How to Write off State and Local Tax.” NerdWallet, www.nerdwallet.com/article/taxes/salt-tax-deduction. Accessed 23 Jan. 2024.
4 “How Does the Deduction for State and Local Taxes Work?” Tax Policy Center, www.taxpolicycenter.org/briefing-book/how-does-deduction-state-and-local-taxes-work. Accessed 23 Jan. 2024.
5 “2023 Instructions for Schedule A (2023).” Internal Revenue Service, 1 Jan. 1970, www.irs.gov/instructions/i1040sca.
6 TaxAct. “Charitable – Mileage.” TaxAct, www.taxact.com/support/1055/2023/charitable-mileage. Accessed 23 Jan. 2024.
7 Henry, Sarah. “Deducting Mortgage Points.” H&R Block, 2 Aug. 2019, www.hrblock.com/tax-center/filing/adjustments-and-deductions/mortgage-points-deduction/.
8 “Deducting Mortgage Interest Faqs.” TurboTax Tax Tips & Videos, turbotax.intuit.com/tax-tips/home-ownership/deducting-mortgage-interest-faqs/L4a9KF9mI. Accessed 23 Jan. 2024.
9 “Mortgage Points Deduction after 2nd Refinance.” Intuit Turbotax, 16 Jan. 2022, ttlc.intuit.com/community/tax-credits-deductions/discussion/mortgage-points-deduction-after-2nd-refinance/00/2007897.
10 “Topic No. 456, Student Loan Interest Deduction.” Internal Revenue Service, www.irs.gov/taxtopics/tc456. Accessed 23 Jan. 2024.
11 “Gambling Income and Expenses.” Internal Revenue Service, www.irs.gov/pub/irs-news/at-01-17.pdf.
12 “Topic No. 419, Gambling Income and Losses.” Internal Revenue Service, www.irs.gov/taxtopics/tc419. Accessed 23 Jan. 2024.
13 “Tax Deductions for Jury Duty Pay and Expenses.” TurboTax Tax Tips & Videos, turbotax.intuit.com/tax-tips/jobs-and-career/tax-deductions-for-jury-duty-pay-and-expenses/L1PuRxctn. Accessed 23 Jan. 2024.
2 2H&R Block. “Is My State Refund Taxable Income If I Itemized My Federal Tax Return?” H&R Block, 5 Aug. 2021, www.hrblock.com/tax-center/filing/adjustments-and-deductions/is-a-state-refund-taxable/.
3 Rosen, Andy. “Salt Deduction 2023: How to Write off State and Local Tax.” NerdWallet, www.nerdwallet.com/article/taxes/salt-tax-deduction. Accessed 23 Jan. 2024.
4 “How Does the Deduction for State and Local Taxes Work?” Tax Policy Center, www.taxpolicycenter.org/briefing-book/how-does-deduction-state-and-local-taxes-work. Accessed 23 Jan. 2024.
5 “2023 Instructions for Schedule A (2023).” Internal Revenue Service, 1 Jan. 1970, www.irs.gov/instructions/i1040sca.
6 TaxAct. “Charitable – Mileage.” TaxAct, www.taxact.com/support/1055/2023/charitable-mileage. Accessed 23 Jan. 2024.
7 Henry, Sarah. “Deducting Mortgage Points.” H&R Block, 2 Aug. 2019, www.hrblock.com/tax-center/filing/adjustments-and-deductions/mortgage-points-deduction/.
8 “Deducting Mortgage Interest Faqs.” TurboTax Tax Tips & Videos, turbotax.intuit.com/tax-tips/home-ownership/deducting-mortgage-interest-faqs/L4a9KF9mI. Accessed 23 Jan. 2024.
9 “Mortgage Points Deduction after 2nd Refinance.” Intuit Turbotax, 16 Jan. 2022, ttlc.intuit.com/community/tax-credits-deductions/discussion/mortgage-points-deduction-after-2nd-refinance/00/2007897.
10 “Topic No. 456, Student Loan Interest Deduction.” Internal Revenue Service, www.irs.gov/taxtopics/tc456. Accessed 23 Jan. 2024.
11 “Gambling Income and Expenses.” Internal Revenue Service, www.irs.gov/pub/irs-news/at-01-17.pdf.
12 “Topic No. 419, Gambling Income and Losses.” Internal Revenue Service, www.irs.gov/taxtopics/tc419. Accessed 23 Jan. 2024.
13 “Tax Deductions for Jury Duty Pay and Expenses.” TurboTax Tax Tips & Videos, turbotax.intuit.com/tax-tips/jobs-and-career/tax-deductions-for-jury-duty-pay-and-expenses/L1PuRxctn. Accessed 23 Jan. 2024.
