Below is a list of the top 48 tax deductions you must know before you file your next tax return. Before you read along, make sure you understand these terms as they will appear often throughout the list.
Tax Deduction: Reduces your taxable income, therefore lowering the amount you owe in taxes by the percentage of the tax you would pay. Example: If your taxable income was $80,000 and you had a tax deduction of $2,500, your taxable income would then lower to $77,500.
Tax Credit: Reduces the amount of tax you owe. A tax credit is a dollar-for-dollar reduction of your income tax liability. For example, if you owe $1,500 in taxes but have a $500 tax credit, then you would only owe the IRS $1,000.
2% rule: In the list below, you will notice many of the deductions will not be applied until the amount you are deducting is more than 2% of your Adjusted Gross Income (AGI).
Now, onto the list…
Mortgage & Housing Deductions
1. Mortgage Insurance Premiums
You can deduct the PMI you paid on your mortgage, but only for policies from 2007 or later.
Mortgage Interest – deduct the interest on loans of $1 million or less (or $500k filing single)
2. Prepaid Mortgage Interest (Points)
You can deduct the prepaid interest you paid to purchase or build your home.
3. Property Taxes
The property taxes are based on the assessed value of your home, meaning the more your home is worth, the more you will have to pay. Fortunately, you can deduct your property tax amount on your federal tax return.
4. Interest on a Home Equity Line of Credit
If you are using the HELOC to improve your home or even purchase a home, the interest you will pay is tax deductible just as it is with a primary mortgage up to $1 million. If you choose to use the HELOC for something else, you can only deduct up to $100k and you can never deduct more than the home’s fair market value.
5. Sale of Your Home
If you sold your home in 2016 for a gain, you can exclude up to $500k for married ($250k single) of gains from your income.
6. Energy-Saving Home Improvements
2016 is the last year you can claim a tax credit for installing energy-saving home improvements, including energy-efficient windows, solar hot water heaters, solar panels, and wind turbines. Look up how much you can deduct here.
7. Home Renovation Deduction for Medical Reasons
If you made improvements to your home for medical purposes (wheelchair ramp, lowered cabinets, wheelchair shower/bath, etc.) you can then deduct these expenses as medical related.
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8. Student Loan Interest
$2,500 or the amount you paid (whichever is less).
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Up to $4,000 for you, your spouse, or a dependent and only if no one else can claim you as a dependent.
10. American Opportunity Tax Credit
You can deduct up to $2,500 per student for four years of college education. Note: This tax credit is set to expire in 2017 and begins to phase out between AGI of $160,000 – $180,000 filing married ($60k – $80k single).
11. College Savings Accounts (529)
33 states currently offer residents a full or partial tax deduction or tax credit for 529 contributions. Example: In Arizona, married couples get a tax deduction up to $4,000 for contributing to any 529 plan. Look up your state here
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12. Daycare, Babysitting, and Summer Camps
If you paid for daycare, a babysitter, summer camp, or any qualified care for children under age 13 (or disabled dependent), you may qualify for a tax credit of up to 35% of expenses up to $3,000 for one dependent or $6,000 for two or more dependents.
13. Work Related Education Expenses
Any expenses you incurred for work-related education may be deductible up to the 2% rule.
14. Homeschool Expenses
Depending on the state you live in, you may claim either a deduction or a credit for expenses for home school expenses. See if your state qualifies here.
Scholarship Tax Credits – Depending on the state you live in, you may qualify for a tax credit for a donations made as tuition assistance or tuition scholarships. You can check to see if your state offers the tax credit here.
15. Cash Donations
Before you take this deduction, understand you can only deduct up to 50% of your adjusted gross income and you must be able to show proof of the donation by providing a written record or a record of donation from the organization.
16. Non-Cash Donations
If you donated goods, you can claim the fair market value.
17. Charity Expenses
If you incurred costs such as travel, lodging, food, and even gas for your car as a required expense for your time and services of charity, you can deduct that amount on your tax return.
Medical Related Deductions
18. Medical & Dental Expenses
If you spent more than 10% of your adjusted gross income, you can deduct your medical and dental expenses beyond that amount.
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19. Medicare Premiums
Part B, Part C, Part D medicare premiums are deductible only if the premiums exceed 7.5% of your income.
20. Self-Employed Health Insurance
If you were self-employed in 2016 and paid for health insurance, you can deduct your premium amounts for medical ,dental, and long-term care insurance.
21. Vision and Hearing Devices
If you paid for eyeglasses, contact lenses, or hearing aids, and they were not covered by insurance and not paid using an Health Savings Account or Flexible Spending Account, you can deduct these expenses on your next return.
Small Business Deductions
22. Home Office Deductions
If you use part of your home for business, you can deduct certain expenses relating to one of the following:
- Primary location for your business
- Primary location for meeting with clients
- Storage facility for product
- Rental Use
23. Expenses for Going into Business
If you paid for advertising, utilities, office supplies, and repairs, you can claim those expenses as a deduction up to $5,000 the first year.
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If you picked up the tab to entertain prospective customers, you can deduct up to 50% of the cost if the entertainment was directly related to business or the entertainment took place immediately before or after a business discussion.
25. Business Use of Your Car
Actual vehicle expenses. You can deduct interest on an auto loan, registration and property tax fees, and parking and tolls in addition to the standard mileage rate deduction (54 cents per mile), as long as you can prove that they are business expenses. The rules for the deduction depend on the type, age, use, and weight of your vehicle. Contact your trusted tax professional for full clarification.
26. Business Travel Expenses
You may be able to deduct non-lavish or non-extravagant business travel expenses that were not reimbursed to you by your employer (if applicable) including the expenses for your passport for international travel.
27. Business Related Interest
If you financed business purchases, the interest and carrying charges are fully tax deductible. This also applies to a personal loan you took out to support your business.
28. Business Donations
If your business is a partnership, LLC, or S-Corp, and your business made a charitable donation, you can pass that deduction to you on your individual tax return. This also includes non-cash donations such as old office furniture or business equipment that was donated.
29. Phone Calls
If you are self-employed and use your phone for business, you can claim the percentage you use your phone for business as a deduction.
30. Social Security Taxes You Paid
Employees don’t get this deduction because they split the 15.3% social security tax with their employers. However, if you are self-employed and paying the full 15.3% social security tax, you can deduct half on your tax return.
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Work Related Deductions
31. Work Uniforms
If you are required by your employer to wear a uniform, you can your uniform expenses as a deduction in 2016. A good rule to follow is only claim this deduction if your uniform couldn’t be used in public or compared to your normal street clothes.
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32. Union Dues
If you are part of a union and pay union dues, you can claim your annual union dues on your 2016 tax return. Union dues are subject to the 2% rule. See 2 percent rule at top.
33. Military Travel Expenses
If you had to travel beyond 100 miles for service, you can subtract your travel expenses (transportation, meals, and lodging) from your income on your 2016 return. There are exceptions, so I would recommend consulting with a tax professional.
34. Job Search Expenses
If you incurred expenses trying to land a new job (even if you didn’t get the job), you may claim a deduction on expenses such as travel, lodging, and even producing/copying your resume.
35. Subscriptions and Professional Journals
If you subscribe to professional journals or publications as a tool to help you with work-related activities, these can expenses can be deducted if not reimbursed by your employer.
36. Educator Expenses Deduction
Teachers can get a credit up to $250 for any out-of-pocket expenses classroom supplies. If two teachers are married filing jointly, they can get the credit increased to $500.
Professional Services Deductions
37. Legal fees
If you incurred legal fees related to tax advice for alimony, keeping your job, doing your job, or any other tax-related legal advice, you may be able to deduct this amount up to the 2% rule. See 2 percent rule at top.
38. Asset Management Fee
You may be able to deduct the fees and costs associated with having someone help you manage your investments. Some of these deductions include the fees for investment counseling, software and online services used to manage your investments, and transportations costs to visit your advisor.
39. Tax Preparation Fees
After you get invoice from your tax preparation professional (or if you paid for DIY software), you can deduct the fees only if they represent more than 2 percent of your adjusted gross income. Example: If your AGI is $50k, then your preparation fees would need to be $1,000 or more. See 2 percent rule at top.
Retirement & Investment Deductions
40. 401(k) other qualified pre-tax retirement accounts
Whether you have a 401(k) at work, a 403(b) if you work for a church, school, or non-profit, or a 457 deferred compensation plan, your contributions are not taxed, therefore lowering your taxable income.
41. IRA Contributions
If you or your spouse don’t have an employer sponsored plan, you may deduct the full amount of your traditional IRA contributions. For 2016 the amounts were $5,500 per person ($6,500 if 50 or older). Keep in mind this does NOT include ROTH IRA contributions.
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42. Early Withdrawal Penalty
If you paid a penalty in 2016 for withdrawing early on your retirement accounts, certificate of deposit, or any other investment account, you may be able to deduct the penalty you paid. However, this does NOT include a loan taken out on your retirement accounts.
Other Common Deductions
43. Car Registration Fees
Depending on the state you live in and how your state calculates their registration fees, you may be able to include that amount in your 2016 deductions.
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44. Bad Luck Losses
If you suffered any losses with your home, household items, and vehicles, and they weren’t covered by insurance, you can deduct the loss amount.
45. Hobby Expenses
If you have a hobby in which you do not earn a profit, you can deduct some expenses incurred from your hobby. Keep in mind you cannot subtract the losses from your income.
If you paid alimony that was not part of child support and was part of a divorce or marriage decree, you can deduct the amount you paid in 2016.
47. State and Local Income Taxes vs State and Local Sales Tax
If you live in a state without state income tax, you may want to consider using the state and local sales taxes you paid in 2016.
48. Did you owe on your state taxes last year?
If you owed a balance on your state return in the previous year and paid it in 2016, you may qualify to deduct what you paid in.
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This is a great list Money Peach! I will definitely bookmark for tax season.
I didn’t know hobby expenses could be deducted, that surprised me. I have way too many hobbies so that is great for me.
Nice list! There are so many deductions available that people don’t know about. That’s why I use a tax software like Tax Cut to do my taxes. I don’t have a complicated enough situation to warrant hiring a tax accountant, but using a simple software ensures I don’t miss out on any deductions.
A few oddities in here, which are great to note. Bad luck losses? Another argument for self insuring as much as you can and considering high deductibles for home insurance, etc…
Most of the list, though, had better not be among the deductions “you are forgetting.” If you or your CPA fails to take credit for your 401(k) contributions or property taxes, it’s time to use tax software or fire your CPA. Also, the AMT will negate many deductions.
Which of these deductions can be taken while still taking the standard deduction? It’s never been a better deal for me to itemize. Also, isn’t there a job relocation deduction?
Great list, thanks for the PDF