By Frank Legan
Tax season is not everyone’s favorite time of year, especially if you typically have to make payments to the IRS. Tax rates, percentages, and deductible expenses can change from tax season to tax season, so it’s important to understand the following 6 tax deductions that often get overlooked.
Out-of-Pocket Charitable Contributions
There’s more to charitable deductions than many people realize. Not only are the big-ticket contributions deductible, but the out-of-pocket expenses paid while volunteering or donating your time to accredited charitable activities are also deductible too.
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 deductible. If you drove your car for charitable causes in 2022, 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 2022 tax filings.
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 deduction.
Student Loan Interest
Another above-the-line deduction that many people forget about is the student loan interest deduction. This deduction allows the borrower to deduct up to $2,500 of student loan interest paid over the course of 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.
With student loan payments on pause for the last two years, many people will not qualify. If you have consistently made payments, or if you have paid down the interest portion on any of your student loans in 2022, make sure to claim this deduction if your modified adjusted gross income is less than the phase-out threshold.
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 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 through 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.
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 actually the case. If you did not itemize your deductions to claim the state income tax paid, then any refund received is not considered income at the federal level. In some situations, even if you do 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.
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. But this deduction is still available for active-duty military personnel. If you or your spouse were an active-duty military member who relocated in 2022 and you did not receive a reimbursement from the government for your move, you will be able to deduct 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.
Don’t Miss Out on Important Tax Deductions & Credits
Managing your tax payments can be confusing, but with the right professionals by your side, it doesn’t have to be. At Frank Legan Advisors at Cedar Brook Group, we strive to help business owners, entrepreneurs, and other self-employed professionals manage their variable income so they can optimize their revenue. Reach out to us at 440-683-9213 or firstname.lastname@example.org or schedule a complimentary introductory call online!
Frank Legan is Partner, Financial Advisor, and member of the Forward Look Committee at Cedar Brook Group, one of the largest independent wealth management firms in Northeast Ohio. Frank spends his days designing and implementing personalized financial planning strategies for corporate executives, closely held business owners, artists, families, and retirees. He specializes in lifetime income strategies, investment advice, and estate planning services. He also works with businesses to develop strategic and succession planning strategies. Frank has a Bachelor of Arts in Political Science from the University of Dayton, as well as a Master of Public Administration focused on municipal management from Cleveland State University. Prior to joining Cedar Brook Group, Frank was a financial advisor in the private client group at Merrill Lynch and with NatCity/PNC Investments. Frank is active in his community, serving on various councils, boards, and committees. Frank serves as Chairman Emeritus of the Board of Directors for Catholic Charities Diocese of Cleveland. When he’s not working, you can find Frank spending time with his wife, Laura, their daughter, Reese, and their beloved collie, Charlie. Frank and his family are volunteers at St. Francis of Assisi church in Gates Mills. To learn more about Frank, connect with him on LinkedIn.
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