The 2017 deadline for your 2016 taxes is a few days later than usual — on April 18 — but don’t procrastinate. If you start focusing on your taxes now, you’ll get your tax refund earlier, you’ll give yourself the time you need to get things right … and you’ll avoid rushing past what could be some valuable income tax deductions.
Deductions are one of a few ways you can end up paying less on your taxes. For instance, tax credits simply reduce the overall amount of tax you have to pay. And exemptions are usually broad-based reductions to your taxable income.
Tax deductions are a little more specific in nature, but typically have to do with reducing taxable income by backing out various expenses you occur throughout the year. And they can range from just a few dollars here and there to several thousands of dollars.
Today, we’ll look at a few income tax deductions that have broad appeal, but still get overlooked by many taxpayers. If you haven’t filed yet, great — your tax return this year might be a little more robust! And if you have filed, sock these deductions away for the coming years.
Income Tax Deductions: Retirement Accounts
Retirement accounts are, simply put, the most important tool when it comes to preparing for your post-career years.
Most retirement accounts — 401ks, IRAs, 403bs and others — provide an immediate tax benefit because you’re able to contribute with pre-tax dollars. After this, your earnings will grow tax-free, and you won’t pay taxes again until you start to make withdrawals. The assumed benefit to this is by the time you do make withdrawals, you’ll be in a lower tax bracket.
Regardless of whether you participate in a corporate plan, you can still contribute to a traditional IRA. (note: Roth IRAs use after-tax money). This online calculator will tell you how much you can contribute. What’s more, if you are self-employed, you can establish a SEP-IRA, which can shelter up to $54,000
When you contribute to employer plans like a 401k or 403b, that money is essentially being deducted automatically from your income, lowering your adjusted gross income.
However, a couple traditional income tax deductions apply to retirement accounts. The most common (and overlooked one): Traditional IRA contributions are tax-deductible up to the maximum annual allowance if you or your spouse don’t have an employer-sponsored retirement plan.
Income Tax Deductions: Capital Losses
On a total return basis, the S&P 500 has produced positive returns every year since 2008, which means people have mostly had to think about capital gains — and, of course, capital gains taxes. No doubt, 2016’s excellent 12% return did nothing to change that.
First off, capital gains taxes enjoy some special treatment if you hold a capital asset for more than a year.
If you’re an individual earning $37,650 to $190,150, or a married couple earning $75,300 to $466,950, you’ll only pay 15% on long-term capital gains. If you earn less, you’ll pay nothing. If you earn more, you’ll pay 20%. I’ve provided a full breakdown of the capital gains tax here.
However, you can also use capital losses to cancel out capital gains, which will lower your tax bite. You match short-term gains versus short-term losses, and long-term gains versus long-term losses. You net them all out, and that’s the number you report on Form 1040.
Where the deduction comes in?
If you net out to a total net loss, you can deduct up to $3,000 in capital gains losses every year. If you lost more than that, you can carry the balance forward to future tax years. So while it’s no fun to remember your poor stock calls, it still pays off to record them.
Income Tax Deductions: Points
Historically low interest rates have spurred quite a bit of refinancing activity in the mortgage arena. The good news? The IRS provides a deduction for points — a point is 1% of your loan — that you pay.
You can deduct the full amount of points in the same year in which you pay them, with a few exceptions.
For instance, you cannot deduct the full amount of points if your home equity debt is greater than $100,000, or if you borrowed more than $1 million to purchase your home. You also have to meet a number of requirements. Per the IRS, they include:
- Your main home secures your loan (your main home is the one you live in most of the time)
- The points paid weren’t more than the amount generally charged in that area.
- The funds you provided at or before closing, including any points the seller paid, were at least as much as the points charged. You can’t have borrowed the funds from your lender or mortgage broker in order to pay the points.
Income Tax Deductions: Casualty Losses
Owning a home might be a big part of the American Dream, but sometimes it can be an absolute nightmare. One of the biggest downsides to homeownership is damage, which is disruptive to your everyday life, time … and, of course, your wallet.
But if you do suffer damage to your home — or other personal property, such as vehicles, for that matter — you might be able to get a little relief via tax deductions.
The event that caused the damage must be sudden and/or unusual. So everyday events such as car accidents and storms are included, though most of us likely won’t have to claim losses from a volcanic eruption or sonic booms — but they’re covered.
And, of course, you can’t deduct anything that was already covered by insurance.
When calculating the deduction, you must first subtract $100 from each loss. You can then deduct any amount in excess of 10% of your Adjusted Gross Income (AGI) — excluding insurance proceeds, as mentioned above.
You then report the casualty loss on both forms 4684 and Schedule A.
Income Tax Deductions: Business Expenses
Typically, when you travel for business purposes, your company will allow you to expense costs like car rental, flights and meals. However, not all costs are reimbursed — and that’s when the IRS swoops in. You’re allowed to expense any qualifying costs that your company doesn’t reimburse, though you’ll only receive deductions once your costs exceed 2% of your AGI. This gets reported on Form 2106.
But what about the self-employed? What about when the person responsible for reimbursing you for business expenses is … you? Good news: You can deduct most qualifying items at 100%, though meals are deducted at 50%. And that goes on Schedule C.
If you’re wondering what “qualifying items” entail, the list is long and broad, including home office expenses, telephone charges, internet costs, traveling costs. If you’re particularly savvy in the sharing economy, that means services like Airbnb, Etsy and Postmates are among things you can use and eventually deduct as business expenses.