Commonly Overlooked Tax Deductions for 2017
Did you see that commercial from H&R Block last year, claiming that Americans overpaid the IRS $1 billion in taxes? In the commercial the narrator says that it is equivalent to putting $500 in every seat of every NFL stadium. This was a powerful marketing strategy because they claim that H&R Block is finding that money and returning it to tax payers. So… how do they do it? The simple answer is that they have a software (just like TurboTax) that knows the right questions to ask in order to help you find deductions and credits that you missed... Here are five things to watch out for that are commonly overlooked.
1. Expenses Incurred for Charitable Endeavors
You can deduct any cost of what you paid out of pocket while being a do-gooder or making the world a better place! For charitable minded people, these small things can really add up. Did you drive somewhere when working with a nonprofit, youth group, church? You can deduct 14 cents per mile (document it!). You can deduct the ingredients used in preparing meals for the poor, in a hamburger you buy for a homeless person, and even the stamps you bought to send your kids magazine or chocolate fundraiser order forms to friends and family. Be sure you keep receipts – it’s common to miss this.
2. State Sales Tax
You can choose to either deduct your state INCOME tax or your state SALES tax. In states such as Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming (where we have some family and clients) make sure you deduct your sales tax… you don’t have any state tax making it an easy choice. In all other places it’s likely going to benefit you only in years that you make a large purchase (car in cash, boat, airplane, etc.). The IRS gives you an easy to use calculator to see if this would benefit you.
3. State tax you paid last spring
We file our taxes AFTER the beginning of a new tax year and we operate (for the most part) on a cash accounting basis. That means if you owed taxes when you filed your 2016 returns you paid it in 2017. Be sure you include that amount with your state tax itemized deduction this year on your return. Be sure to also include the state income taxes that were withheld by your employer from your paychecks. (If you’re self employed, this would be your quarterly estimated payments.)
4. Child and Dependent Care Tax Credit
You may qualify for a tax credit worth between 20% and 35% of the child care expense you incur while you work. You read that right… a tax CREDIT. Credits are amazing – a dollar for dollar reduction in taxes owed. This percentage is calculated on up to $6,000 of qualifying expenses.
If your employer offers a child care reimbursement account — which allows the employee to pay for the child care with pretax dollars — that is likely even better because the money flowing through that account (up to $5,000) is pre-tax and also avoids the 7.65% Social Security tax!
5. Investment fees and expenses
You read that right. Whatever you pay us on your taxable accounts is likely to be deductible. You’re welcome! Taxpayers are entitled to take a “miscellaneous deduction” for certain investment related expenses. Here are some examples of items you can likely deduct...
Investment management fees of taxable accounts
Fees for investment counseling or financial planning
Custodial fees to places like TD Ameritrade or Schwab
Software and online services you used to manage investments
Safety deposit rental fees if it’s holding investment related items like gold
Transportation costs to and from an investment or financial advisor’s office
Attorney costs you used to collect taxable income
Costs to replace lost or stolen security certificates
This article isn’t intended to give tax advice. Lily Wealth Management and Prosperity Financial Group recommend that all of our clients work with a competent tax and accounting professional both for estate planning purposes and for preparing their state and federal returns. This article should be used merely as a discussion tool with this professional.