Uncle Sam provides numerous tax credits and deductions, and while some are well-known, such as deductions for mortgage interest, there are a host of other commonly overlooked tax credits and deductions.
The tax laws change annually, too, so some tax deductions and credits are being phased out, making the 2016 tax season the last year to take advantage of these savings.
Not everyone can take advantage of all deductions. Steve Grove, managing director at CBIZ MHM in Tampa, Florida, says many tax credits and deductions are subject to income limits, so high earners may not qualify.
However, Brion Collins, managing director and principal at Bronfman E.L. Rothschild near Milwaukee, says tax filers whose income changed substantially in the past year due to job loss or other circumstances should review if they are eligible for these credits.
Saver’s credit. Just one in three American workers are aware of the saver’s credit, a tax credit that the Internal Revenue Service offers to eligible taxpayers who contribute to a 401(k), 403(b) or IRA (including myRA), says Catherine Collinson, president of Transamerica Center for Retirement Studies in Los Angeles.
“There’s a misconception about the credit, because it’s always been referred to as for low-income (filers),” she says. “Some people don’t realize they can qualify for it, especially depending on where you live in the country.”
For 2016, the income limit is $30,750 for a single person, while those who are married and filing jointly must make less than $61,500 or $46,125 for head of household. Depending on earnings, for the first $2,000 contributed into a qualified plan, savers can get up to $1,000, plus there’s the tax-deferred savings, Collinson says.
Collins also agrees this credit is very often a missed opportunity because it’s less known and some people don’t realize they qualify for it.
“They could be literally getting free money,” he says.
Charitable donations. It’s easy to account for cash donations, but Collins says people often undervalue non-cash donations. Take the time to itemize donations like clothing or household goods. Websites like Itsdeductible.com can estimate the fair value of those goods, and it can add up to be significant money.
“It could be hundreds or even thousands of dollars that if you wouldn’t have taken the time to itemize you probably wouldn’t have taken more than a couple hundred bucks total,” he says.
People who drive or take public transit to volunteer at charitable events can write off the cost.
“If you bake a casserole for the church, take a deduction for what you spent,” he says.
Rebecca Walser, a certified financial planner at Walser Wealth in Tampa, says given the rise in the stock market, many people may consider selling equities and donating the proceeds. Instead, she says, if the charity accepts stock, make the appreciated stock the donation.
“You avoid the capital gains that you have received if you sold the appreciated stock, but you get the full fair-market deduction when you donate it to the charity,” she says. “It’s like a double tax benefit.”
Car donations are also popular, but often cars donated without instructions are sold at wholesale auctions and the donor receives a write-off based on the sale price. But, Walser says, if the car is worth more than $500 and is in working condition, people can donate the vehicle to a charity and specify it’s for a needy family.
“What that does is it allows you to get the retail fair-market Blue Book value of the donation as opposed to get whatever they (the charity) got for wholesale for cash,” she says.
Sales tax. In states where there is no income tax, filers can deduct sales tax, says Ivy Chou, marketing and public relations director at a San Jose, California-based consumer website, DealsPlus.com
“If you spent a lot of money on a car or jewelry, then it may be worth it,” she says.
Grove says filers can itemize or use an IRS-provided standard table based on their adjusted gross income, which is an average basket of goods in the IRS’s judgement based on big ticket items like, cars, boat or airplanes. Grove says it’s usually better to itemize.
Even in states where there is income tax, sometimes it makes more sense to take the sales tax deduction, Collins says.
“If state income taxes are lower than what you spent on a major purchase, like a car, it can be a significant expense,” he says. “We see more people doing home renovations, they might be spending $10,000 or $20,000 in renovations. The sales tax then might exceed the income tax.”
Chou adds, if the renovations are made for medical purposes — like adding wheelchair ramps or making the bathtub or shower more accessible, for example — then filers can deduct the expenses.
Job-hunting expenses. Filers who looked for a new job in 2016 can deduct expenses, as long as it’s in the same line of work. Expenses include tolls, parking and paying a recruiter, she says. However, career-switchers can’t itemize their expenses, she adds.
Chou and Al Zdenek, president, chief executive officer and founder of New York-based Traust Sollus Wealth Management, and author of “Master Your Cash Flow: The Key to Grow and Retain Wealth,” say people who moved for a new job can deduct the moving expenses, too.
Zdenek says people who spread their move into a second calendar year, such as December to January, can deduct costs on two years of tax forms. “People forget that. They may have taken it off for the 2015, but forget for 2016,” he says.
Last-chance deductions. The 2016 filing season sees a couple of deductions ending, says Grove. Except for solar panels, deductions for most residential energy efficiency improvements like new windows, doors or heating/cooling systems are sun-setting.
For people who need to have private mortgage insurance because they didn’t have enough of a house down payment, this is the last year they can deduct the premiums on their returns, Grove says.
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