By Angela Dorsey
Tax season is here, whether you’re prepared or not. While most people tend to procrastinate when it comes to taxes, you can save time and money by planning ahead. One way to do that is to become familiar with some of the tax deductions and credits you may be eligible for so you can have those documents ready for your tax professional. Utilizing as many tax deductions as possible is one tax planning strategy that helps save more money by limiting your tax liability. To help with your planning, we have compiled a list of the 6 most overlooked tax deductions that can help you save on your tax return.
1. Out-of-Pocket Charitable Contributions
There’s more to charitable deductions than many people realize. Not only are the big-ticket contributions tax deductible, but the out-of-pocket expenses paid while volunteering or donating your time to accredited charitable activities are also deductible.
For instance, if you participate in charitable activities that involve up-front expenses, these may be deductible on your tax return. Whether you purchase canned goods for a food drive or supplies for a local school fundraiser, your contributions are tax-deductible. If you drove your car for charitable causes in 2023, you can also deduct 14 cents per mile and the cost of tolls. You must keep a detailed log and receipts for these types of charitable giving.
Remember to keep your receipts and obtain verification for any contributions over $250 to make sure all your bases are covered. Every tax situation is different so always speak to your tax advisor about the possibility of these deductions in preparing your data for your 2023 tax filings.
2. Self-Employment Social Security & Medicare Tax Deduction
For self-employed individuals, you can deduct a portion of the Social Security and Medicare tax you pay. Since self-employed individuals are required to pay both the employer and employee portion of Social Security and Medicare tax, there is a tax deduction available for the portion considered paid by the “employer.”
The full tax is 15.3% of net earnings, but you can write off 7.65% using this deduction. The best part is that this is an above-the-line deduction, which means it can be used in conjunction with the standard tax deduction.
3. Student Loan Interest
Another above-the-line tax deduction that many people need to remember is the student loan interest deduction. This deduction allows the borrower to deduct up to $2,500 of student loan interest paid during the year, even if the loan is repaid by someone else. Depending on your total income and the filing status you are using to file your return, this may be another deduction to take.
Here’s an example. If you took out a Parent PLUS Loan for your child to attend school and they have been the person making the payments, you can still deduct whatever interest was paid on your tax return since you are technically the borrower. In this case, the IRS assumes that your child gave you the money, and then you paid the debt yourself, thus allowing the borrower (not the payor) to receive the tax deduction.
If you have consistently made payments or paid down the interest portion on any of your student loans in 2023, make sure to claim this deduction if your modified adjusted gross income is less than the phase-out threshold.
4. Medicare Premiums for Self-Employed Individuals
If you’re over the age of 65, enrolled in Medicare, and self-employed, then you can deduct some or all the premiums paid for Medicare Part B and Part D as well as the cost of any supplemental policies or the Medicare Advantage plan.
The good news is this is an above-the-line tax deduction, so you do not have to itemize and the premium costs will not be subject to the 7.5% AGI floor that typically applies to medical expenses. Note that you are only eligible for this deduction if you are not also covered by an employer health plan, whether that be through a second job or your spouse’s employer.
The even better news is that even if you are not 65 or enrolled in Medicare, you can still deduct the cost of healthcare (and long-term care) premiums if you are self-employed and not covered by an employer health plan.
5. State Income Tax Refund
Many people automatically assume they are required to report a state income tax refund as income on their federal tax return. But this is not the case. If you did not itemize your deductions to claim the state income tax paid, any refund received is not considered income at the federal level. In some situations, even if you itemize your deductions, your state tax refund may still not be taxable depending on certain factors.
Since most taxpayers claim the standard deduction and do not claim state and local tax deductions, the majority of those who receive a state income tax deduction do not need to report it on their Form 1040. Keep this in mind as you file your taxes this year, and don’t mistakenly report more income than is rightfully taxable.
6. Moving & Travel Expenses for Military Personnel
When the Tax Cuts and Jobs Act was signed in 2017, many taxpayers lost the ability to deduct moving expenses on their tax returns. However, this deduction is still available for active-duty military personnel. If you or your spouse were an active-duty military member who relocated in 2023 and you did not receive a reimbursement from the government for your move, you will be able to deduct a portion of move-related expenses including the cost of travel, lodging, moving supplies, services, and shipping.
What’s more, military reservists and National Guard members are also able to deduct the cost of work-related travel as long as the travel is overnight and more than 100 miles away from home.
What Tax Deductions Are You Eligible For?
There are many tax deductions available, but we have included the most commonly overlooked ones here. You can ask your tax professional which ones you qualify for since it will depend on your unique situation and specific circumstances. If you are already working with us, we would be happy to meet with you to review your financial plan, confirm you’re on track toward your retirement goals, and navigate this tax season with confidence.
At Dorsey Wealth Management, we offer comprehensive financial planning for women and couples who want to retire with confidence to a life they love. If you are looking for a financial advisor you can trust, then we would love to meet with you and see if we are a good fit. Schedule a free introductory 30-minute phone call. You can also reach us at (310) 370-7776 or firstname.lastname@example.org.
Angela Dorsey is the founder and financial advisor at Dorsey Wealth Management, a fee-only financial planning firm based in Torrance, California, helping women prepare for retirement. Angela earned a BS in computer science from Loyola Marymount University, an MBA from UCLA Anderson School of Management, and spent 20 years as a Senior Compensation Specialist in large corporations before becoming a CERTIFIED FINANCIAL PLANNER™ professional and a Registered Investment Advisor (RIA). That background gave her the tools to couple with her passion for empowering women to make the best financial decisions possible. Angela lives in Torrance, California, with her husband. She enjoys spending time at the beach or surrounded by nature. To learn more about Angela, connect with her on LinkedIn.