Sep 03, 2021Four Uncommon Deductions to Claim in 2021
As accountants, we love helping people take advantage of existing benefits to help save them money. Where does that show up? Your tax return. The most recent numbers show that more than 45 million people itemized deductions on the 1040 tax form, amounting to about $1.2 trillion dollars worth of tax deductions. That same year, people who claimed the standard deduction and chose not to itemize claimed about $747 billion. Moral of the story? Don’t take the standard deduction just because it’s easier. Take the time to learn if there are available deductions that could save you substantial amounts of money.
To help with this process, we've compiled a list of the most overlooked tax deductions. Skim through these and take a deep dive if there are any you haven’t heard of before.
#1 State sales tax
When filing a tax return, you must choose between deducting state and local income tax or state and local sales tax. Some states don’t actually impose income tax, so for these states, taking the state and local income tax deduction is usually the better deal.
For individuals living in an income-tax free state, you can either use the IRS tables provided for your state to determine your deduction or you can keep track of all the sales tax you paid during the year and use that. Additionally, if you purchased a vehicle, boat, airplane, home, or home renovation project, you may be able to add the state sales tax paid to the amount listed on the IRS table.
The most straightforward process is to use the IRS’s Sales Tax Calculator to determine which one is more cost effective for you.
#2 Reinvested Dividends
Technically, this isn’t a tax deduction. This is a simple subtraction that can save you a lot of money. If you’re a typical investor, you have mutual fund dividends automatically reinvested in extra shares, increasing your “tax basis” in the fund. This in turn reduces the amount of taxable capital gains when you sell your shares. If you forget to include the reinvested dividends in that cost basis, it means you are overpaying taxes.
#3 Charitable Donations
When most people think of charitable donations, they think of large checks written to universities, or a massive donation to a local church. If you’re in this camp, great. Take advantage of the tax savings. However, many people offer infrequent charitable donations that can also be written off. Ingredients for casserole you regularly prepare for a nonprofit or the cost of stamps for a children’s school fundraiser both count. Also, if you drove your car for charity, be sure to deduct money for gas and vehicle expenses.
#4 Student loan interest
In the past, when parents or another party paid off a student loan incurred by a student, no one got a tax break. However, the current law states that a student who isn’t claimed as a dependent can qualify to deduct up to $2500 of student loan interest paid by the student or another party. This is especially beneficial for individuals just starting to pay off loans. Talk to your accountant if this is something that would apply to you.
There are plenty more deductions available for taxpayers. Be sure to have an in-depth conversation with your tax preparer to ensure that you’re taking advantage of each of these benefits. At Nimbl, we love working hard for our clients to ensure they receive the best deals.