1. Volunteer work and donations
Yes, there’s a (financial) reward for your generosity.
In addition to being able to claim an “above-the-line” deduction — which lowers your adjusted gross income (AGI) and taxable income — on charitable donations of more than $300 to qualifying organizations, you can also write off any out-of-pocket expenses for volunteer work. Those expenses include travel, transportation, wining and dining on behalf of a charity, gas and oil for your car and even the cost of a volunteer uniform.
To deduct these expenses, you may need documentation from the charity itself — especially if your costs total more than $250. That document should include the nature of your volunteering activity and why it should be covered as well as a detailed list of all your expenses.
2. Medical and dental expenses
While staying healthy has its own benefits, you can also claim medical and dental costs for yourself, your spouse and your dependents on your taxes.
Even if you have health insurance, these expenses can add up.
It is always a good idea to compare health insurance rates to make sure you are getting the best price possible.
Once you’ve hit more than 7.5% of your adjusted gross income (AGI), you can deduct any payments relating to diagnosis, cure, mitigation, treatment or prevention of disease as well as any treatments that affect the structure or function of the body.
3. Housing expenses
There’s a whole assortment of deductions you can take advantage of as a homeowner. Whether it’s the points you pay when you refinance your home, your mortgage interest and mortgage insurance premiums or your state and local real estate and sales taxes, you can claim some significant tax breaks.
Basically, you can claim everything from your house payments except for your principal payments and homeowners insurance.
4. Education expenses
Students pay an average of $35,720 a year in college tuition. To help offset these costs, the American Opportunity Credit grants students (or their parents, if the student is listed as a dependent) $2,500 in the first four years of higher education.
When the credit is applied, if it brings the amount of tax you owe the IRS down to zero, they’ll return up to $1,000 to you in a refund.
To claim this credit, students should receive a Form 1098-T from their school by the end of January.
5. Student loan interest
Paying back your student loans can eat up a huge chunk of your monthly budget. And like with other large loans, a good portion of it will be interest on what you originally borrowed.
Every year, you can deduct up to $2,500 of the interest you pay on your loan. You can claim this deduction as an adjustment to income, meaning you won’t have to itemize your deductions.
As long as you paid at least $600 in student loan interest over the year, you should receive a Form 1098-E to claim this deduction.
Joe Biden has talked about his plans and promises for student loan forgiveness in the near future but they may have major tax implications.
6. Child care expenses
If you have to put your child or children in daycare so you can work (or actively look for work), you can claim some of your expenses under the Child and Dependent Care Expenses credit.
How much you’ll receive in a credit is based on a percentage of what you pay your caretaker and your adjusted gross income. Depending on your income bracket, you’ll qualify for a credit for 20% to 35% of what you spent in child care costs.
There’s a maximum of $3,000 for one child and $6,000 for two or more children and they’ll have to be under the age of 13 to qualify.
7. Car expenses
If you’re self-employed and you use your car for business, you can deduct your expenses.
You can either report it at a standard mileage rate or as the actual expenses. For 2020, the mileage rate is 57.5 cents per mile. Alternatively, you could deduct what you actually paid over the year for your car costs like your lease, auto insurance, parking fees, repairs and tires.
8. Gambling losses
If you’re not a professional gambler, any money you make gambling has to be reported as “other income” in your taxes. That includes any cash you get from lotteries, raffles, horse races and casinos or the fair market value of prizes like cars or trips.
On the bright side, if you keep a record of your winnings and losses, you can deduct your losses (as long as they don’t exceed the amount of income you report on your return).
Keep in mind that you’ll have to be able to produce receipts, tickets, statements or other records that document your winnings and losses if the IRS requests them.
9. Reinvested dividends
Whether you use a broker or investing app, if you invest in mutual funds, you probably have it set up to automatically reinvest your dividends.
But every new purchase increases your cost basis in the fund, which reduces your taxable capital gain when you redeem shares.
If you forget to include your reinvested dividends in your basis, you’ll end up paying tax on them twice: Once when they were paid out and then reinvested and the second time when they’re included in the proceeds of the sale.
This one isn’t specifically a deduction, but it can ensure you save a bunch on your taxes every year. If you’re not sure how to handle this on your taxes, ask the fund for help.