16 Most-Overlooked Tax Deductions, Credits, and Exemptions

State Income Tax Refund

There's a line on Schedule A of the IRS Form 1040 for reporting a state income tax refund.  But most taxpayers who get state tax refunds don’t need to report it on their federal income tax return. That’s because the state tax refund isn’t taxable to you if you claimed the standard deduction for state and local taxes on your most recent federal tax return.

So, if you didn’t itemize deductions in the year that you received the state income tax refund, you shouldn’t report the refund as income. Basically, don’t unnecessarily report a state income tax refund.

However, if you are unsure whether your state income tax refund is taxable, consult a professional to help you figure out whether the income on the Form 1099-G is taxable to you.

Out-of-Pocket Charitable Deductions

It's easier to remember large charitable gifts that you made during the year, by check or payroll deduction. But smaller charitable gifts are important as well and can add up. And did you know that you can write off out-of-pocket costs that you incur while you are doing work for a charity?

For example, ingredients you purchased to prepare meals for a nonprofit organization's soup kitchen, or stamps that you buy for a school's fund-raising mailing, can be considered charitable contributions.

Keep your receipts. If your contribution totals $250 or more, you'll also need an acknowledgement from the charity documenting the support you provided. Also, if you drove your car for charity during the year, you can deduct 14 cents per mile, plus parking, and tolls paid.

State Sales Taxes

This deduction is particularly important if you live in a state that doesn't impose a state income tax. If you itemize deductions, you can either deduct the state income taxes or the state and local sales taxes that you paid. You choose whichever saves you the most money.

In some cases, people who pay state income taxes can also deduct sales taxes. The IRS has a calculator that shows how much residents of various states can deduct, based on their income and state and local sales tax rates. For example, if you purchased a vehicle, boat or airplane, the calculator includes the tax you paid on that big-ticket item when it calculates total sales tax deduction amount.

Unfortunately, however, the sales tax deduction is added to your local property taxes. And there isa $10,000-per-year maximum for the combined total of these taxes ($5,000 if you're married filing separately).

Gambling Losses

The tax deduction for gambling losses is only available if you itemize deductions. Also, the gambling loss deduction is limited to the amount of gambling winnings that you report as taxable income. But in addition to "traditional" gambling losses (e.g., at a casino), the cost of non-winning bingo, lottery, and raffle tickets, as examples, are also considered to be tax deductible gambling losses.

If you plan to take this tax deduction, be sure you keep all your gambling receipts (e.g., losing tickets).

The IRS also suggests that you keep a daily diary of gambling activity that includes the date and type of wagering, name and location of gambling establishments, names of people with you when you gamble, and amounts that you won or lost.

State Tax Paid for Previous Year

Did you owe tax when you filed your 2021 state income tax return? Then, you can include that amount in your state-tax deduction on your 2022 federal return. You can also include the state income taxes that were withheld from your paychecks, or that were paid via quarterly estimated payments during the year.

Just remember, that the state and local tax deduction is limited to $10,000 a year ($5,000 if married filing separately).

Jury Pay Given to Employer

Many employers pay employees' full salaries while those employees serve on jury duty. In some cases, employees must give their jury pay to the company if the company paid that employee’s salary during their time on jury duty.

So, while the IRS requires that you report jury pay as income, you are allowed to claim a tax deduction for jury pay (if any), that you returned to your employer.

Child and Dependent Care Credit

Childcare can be expensive for many parents and families. That's where the child and dependent care tax credit comes in.

For 2022, if you paid a provider to care for you children under age 13, (or a disabled dependent of any age) you could be eligible for a non-refundable tax credit up to of up 35% or $3,000 of qualifying expenses for one child. For two or more qualifying children, the credit can be up to $6,000 for two or more qualifying children.

The child and dependent care credit can also help pay for the costs of caring for other dependents. For example, expenses related to care for an elderly parent living with an adult child, can qualify for the credit, if that elderly parent is claimed as a dependent on the child's tax return.

Dependent Tax Credit

There is a $500 tax credit for claiming a dependent on your return when that dependent doesn’t qualify for the child tax credit. So, your children over 17 years of age can save you some money at tax time–even if they're in college. You can also claim the dependent tax credit for older relatives that you are caring for at home.

However, it is important to note that the combined total of both the child credit and the credit for other dependents is phased out for the 2022 tax year if your adjusted gross income is more than $200,000. If you’re married filing jointly, the phase out AGI amount is $400,000.

Social Security Taxes You Pay When You're Self-Employed

If you're self-employed and pay the full 15.3% Social Security and Medicare tax yourself (instead of splitting it 50-50 with an employer), you can write off half of what you pay. (The Social Security tax portion is 12.4% on some of your net earnings. The Medicare tax is 2.9% of your net earnings)

Plus, you don't have to itemize deductions on your federal income tax return to take advantage of this deduction.

Refinancing Points

When you buy a house, you get to deduct the points that you paid to get your mortgage. 

• When you refinance, though, you generally must deduct the points on the new loan over the life of that loan.
• That means you can deduct 1/30th of the points each year if you have a 30-year mortgage.
• Based on that example, that amounts to $33 a year for each $1,000 of points you paid.

Additionally, if you use part of the refinanced loan to improve your home, you might be able to deduct points related to the improvements. (The rest of the points are deducted over the life of the loan.)

Either way, in the year that you pay off the loan (e.g., either because you sell the house or refinance) you can deduct all as-yet-un-deducted points.

Note: There's one exception to this sweet rule, however. If you refinance a refinanced loan with the same lender, you add the points paid on the latest deal to the leftovers from the previous refinancing. Then, you deduct that amount gradually over the life of the new loan.

American Opportunity Credit

The American Opportunity tax credit is based on 100% of the first $2,000 spent on qualifying college expenses, and 25% of the next $2,000—for a maximum annual credit per student of $2,500. However, the credit is only available for the first four years of college.

The full credit is available to individuals whose modified adjusted gross income is $80,000 or less. If you are married filing jointly that income limit is $160,000 or less. But the American Opportunity tax credit is phased out for taxpayers with income above those levels.

If the American opportunity tax credit exceeds your tax liability, it might trigger a tax refund. (That partly because most tax credits are "nonrefundable," meaning they can potentially reduce your tax liability to zero but not result in a check from the IRS.)

Lifetime Learning Credit

The Lifetime Learning credit can be claimed for any number of years and can be used to offset the cost of higher education for yourself or your spouse—not just for your children.

The credit is worth up to $2,000 a year, based on 20% of up to $10,000 you spend for post-high-school courses that lead to new or improved job skills. Classes you take at a vocational school or community college can qualify.

Like the American Opportunity tax credit, the right to claim the Lifetime Learning tax credit on your 2022 federal tax return phases out for income between $80,000 to $90,000 for individuals. The phase-out for married couples filing jointly is between $160,000 to $180,000.

Student-Loan Interest Paid By a Parent

Generally, you can only deduct interest if you are legally required to repay the debt. But if a parent pays back a child's student loans, the IRS treats the transactions as if the money were given to the child, who then paid the debt.

So, if the child is no longer claimed as a dependent, they can deduct up to $2,500 of student-loan interest paid by their parent(s) each year. And the child doesn't have to itemize deductions to claim this tax deduction.

Deduction of Medicare Premiums for the Self-Employed

Seniors who continue to run their own businesses after qualifying for Medicare can deduct the premiums, they pay for Medicare Part B and Part D, plus the cost of supplemental Medicare (medigap) policies or the cost of a Medicare Advantage plan.

This deduction is available whether you itemize or not and is not subject to the 7.5% of adjusted gross income test that applies to itemized medical expenses.

However, you cannot claim this deduction for premiums paid for any month that you were eligible to be covered under an employer-subsidized health plan offered by your employer (if you have a job as well as your business). The same is true if you are eligible to be covered under your spouse's employer if they have a job that offers family medical coverage.

Waiver of Penalty for Retired Seniors

Because the U.S. tax system operates on a pay-as-you earn basis, taxpayers typically must pay 90% of what they owe during the year, or 100% of the previous year's tax, via withholding or estimated tax payments. 

If you don't and you owe more than $1,000 when you file your return, you can be hit with a penalty for underpayment of taxes. The penalty works like interest on a loan, as though you borrowed from the IRS the money that you didn't pay.

There are several exceptions to the penalty, including a little-known one that can protect taxpayers ages 62 and older in the year they retire and the following year. 

You don't claim this on your federal income tax return. Instead, you can request a waiver of the penalty using IRS Form 2210—if you have "reasonable cause."

There are several exceptions to the penalty, including a little-known one that can protect taxpayers age 62 and older in the year they retire and the following year. You can request a waiver of the penalty — using IRS Form 2210 — if you have "reasonable cause."

Military Reservist Travel Expenses

Members of the National Guard or military reserves may write off the cost of travel to drills or meetings. To qualify, you must travel more than 100 miles from home and be away from home overnight. If you qualify, you can deduct the cost of lodging and half the cost of your meals, plus an allowance for driving your own car to get to and from drills.

For 2022 travel (due to a mid-year IRS adjustment), the rate is 62.5 cents per mile (65.5 cents per mile for 2023), plus what you paid for parking fees and tolls. You may claim this deduction even if you use the standard deduction rather than itemizing deductions.