Five Most Overlooked Tax Deductions

Who among us wants to pay the IRS more than we have to? While few may raise their hands, Americans regularly overpay because they fail to take deductions for which they are eligible. Let’s take a quick look at the five most overlooked opportunities to manage your tax bill.

Reinvested Dividends: When you receive a dividend or capital gains distribution from your mutual fund, it becomes a taxable event unless you hold the fund in a tax-deferred account like an IRA. Like most fund owners, you probably reinvest these payments in additional fund shares. The tax trap lurks when you sell your mutual fund. Failing to add the reinvested amounts to the investment’s cost basis can lead to those dividends being taxed twice.1

Mutual funds are sold only by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.

Out-of-Pocket Charity: It’s not just cash donations that are deductible. If you donate goods or use your personal car for charitable work, these are potential tax deductions. Just be sure to get a receipt for any amount over $250.2

State Taxes: Did you owe state taxes when you filed your previous year’s tax returns? If you did, remember to claim this payment as a tax deduction on your current year’s tax return. There is currently a $10,000 cap on the state and local tax deduction.3

Medicare Premiums: You may be able to deduct unreimbursed medical and dental premiums, co-payments, deductibles, and other medical expenses to the extent that the costs exceed 7.5% of your adjusted gross income. This includes most Medicare premiums.4

Income in Respect of a Decedent: If you’ve inherited an IRA or pension, you may be able to deduct any estate tax paid by the IRA owner from the taxes due on the withdrawals you take from the inherited account.5

In conclusion, strategically leveraging overlooked tax deductions such as reinvested dividends, out-of-pocket charity contributions, state taxes from previous years, Medicare premiums, and deductions related to income in respect of a decedent can significantly mitigate one’s tax liabilities. By actively incorporating these deductions into your tax planning, you not only adhere to the legal framework but also optimize your financial health. It’s imperative for taxpayers to remain informed about these opportunities and consider consulting with tax professionals to ensure they maximize their tax benefits. This proactive approach towards tax deductions can lead to substantial savings, ultimately enhancing one’s financial well-being.