Obscure and Overlooked Tax Deductions, Credits, and Benefits

• Find out how to deduct your state income tax from your federal taxes.
• Discover the Social Security taxes deduction for self-employed taxpayers.
• You now have 5 years to use the NOL carryback–find out how!
• Learn about the charitable contribution deduction for non-itemizers.
• Find out how PPP loan expenses can be deducted.
• Did you know that military reservists can deduct travel expenses?
• Learn the limits to using SEC. 529’s to pay for a child’s private school expenses.
• Discover how parents can pay student loans and children can reap the tax deductions.
• Find out which 2019 tax benefits got a 2020 extension.
• How can you deduct gambling losses?
• Do you live in a state without a state income tax?
• Learn how a non-working spouse can contribute to a spousal IRA.
• Did you receive the full amount of your Economic Impact Payment? If not, claim it as a credit.
• Hold onto your Economic Impact Payment document (Notice 1444) with all of your other important tax documents.
• Find out why tracking your reinvested dividends is so important.
• Don’t wait to claim your loss on worthless stock!
• Don’t overlook the Lifetime Learning Credit.
• Do you know about charity volunteer tax breaks for costs incurred while performing volunteer work?
• Find out which self-employed travel expenses you should keep track of.
• Learn the restrictions of the self-employed health insurance deduction.
• Did you know that summer camp expenses can count towards the child and dependent care credit?
• Do you qualify for a medical dependent deduction?
• Learn more about the Income in Respect of a Decedent (IRD) deduction.

Missing out on little-known and overlooked tax deductions?

As tax time approaches, here are some tax issues that taxpayers frequently overlook. They range from obscure deductions to overlooked tax credits and benefits. Of course, Fiducial can’t include everything since the tax law has grown significantly in complexity, and it would take a thick book to list everything. But besides what you might expect, Fiducial has over 20 issues you may not be aware of and that can save you tax dollars.

State income tax as federal tax deduction?

For those who took the standard deduction on their 2019 federal return, your state income tax refund received in 2020 does not count as taxable income. If you itemized your deductions, then you could use your state tax as a federal tax deduction. To the extent you received a tax benefit from the deduction, the state tax refund you received in 2020 counts as federally taxable.

However, in many cases, the entire refund will be tax-free if you were subject to the alternative minimum tax (AMT) for 2019, the deductible amount was reduced by the $10,000 limit on tax deductions, or part of the deduction pushed your deductions over the standard deduction threshold. Although the Form 1099-G shows the entire amount of the refund, not all of it may be taxable. So, you do not want to report more than necessary.

Did you owe state income tax on your 2019 return and pay that tax during 2020? Then you may add that tax payment to your state tax deduction for 2020, subject to the $10,000 limit for state and local taxes.

Social Security taxes deduction

Self-employed tax payers can deduct half of the self-employment tax (Social Security and Medicare tax) liable on your 2020 net profits. You don’t have to itemize on a Schedule A to take the deduction because it is an adjustment to income.

NOL carryback

The year 2020 has presented challenges for many businesses, especially those subjected to COVID-19 closure orders and ended up with a tax loss for the year. However, the CARES Act does allow a 5-year carryback period in which to use the loss (known as a net operating loss) for business owners who cannot utilize the full loss in 2020. You may do this by amending prior returns to recover the taxes paid in the earlier year(s). First, amend the 2015 return. Then, if you cannot use all of the loss on that return, amend the 2016 return, and so on.

Charitable contribution tax deduction for non-itemizers

For the first time ever, taxpayers can claim a cash charitable contribution without itemizing their tax deductions on Schedule A. Non-itemizers can deduct up to $300 in cash contributions per tax return. Unfortunately, the $300 limit – and not $600 – also applies to married taxpayers filing jointly. So, hold onto those receipts to substantiate the contributions.

PPP loan expenses

Don’t forget that the COVID-Related Tax Relief Act passed late in December 2020 confirmed that business expenses paid for with proceeds from a forgiven PPP loan continue to be deductible on the business schedule. However, this may not be true for state taxes.

Military reservist travel expenses

Armed forces reservists who travel more than 100 miles away from home and stay overnight in connection with service as a member of a reserve component can deduct their travel expenses as an adjustment to gross income (they don’t have to itemize deductions).

Unreimbursed expenses for the reservist’s transportation, meals (subject to the 50% limit for 2020), and lodging qualify for the above-the-line deduction, but the deduction is limited to the amount that the federal government pays its employees for travel expenses – i.e., the general federal government per diem rate for lodging, meals, and incidental expenses applicable to the locale as well as the standard mileage rate (57.5 cents per mile for 2020) for car expenses plus parking, ferry fees, and tolls.

Child’s private school expenses

If your child attends a private school, the TCJA allows up to $10,000 per year of Sec. 529 college savings plan funds to pay tuition for kindergarten through grade 12. However, tapping your college savings plan for these expenses may challenge your overall long-term savings plan to pay for college.

Student-loan interest

If parents pay back a non-dependent child’s student loans, the IRS treats the transactions as if the money were a gift to the child and the child made the payment. Thus, the IRS deems the child to have paid any interest included in the payment and they can deduct it as student-loan interest. They may deduct interest without having to itemize deductions, up to the annual limit of $2,500.

Extended tax benefits

A number of tax benefits that had expired at the end of 2019 were extended, without much fanfare, and are still available in 2020. In case you missed any of them, they include the following:

• A tax credit of up to $500 for installing energy-efficient improvements in your home, including exterior windows and skylights, exterior doors, metal roofs with appropriately pigmented coatings, asphalt roofing with appropriate cooling granules, energy-efficient heating and air-conditioning systems, insulation materials, or systems designed to reduce heat loss or gain. The $500 limit is a lifetime limit, so if you’ve taken this credit in the past, you need to take into account the amount of credit you claimed previously.
• A tax credit of up to $2,500 for purchasing a qualifying electric motorcycle.
• A deduction for mortgage insurance premiums on a loan used to purchase the home (acquisition debt).
• Forgiveness of qualified cancellation of debt income on a principal residence.
• Tax credits for fuel-cell vehicles and alternative-fuel-refueling property.

Gambling losses

Gambling losses up to the extent of one’s gambling winnings are allowed as a deduction and can help to offset gambling winnings, provided the taxpayer itemizes deductions.

Live in a state without a state income tax?

If you live in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming, these states do not have an income tax. Because you can choose to deduct either state income tax or sales tax, if you itemize your deductions, your only choice will be sales tax.

The sales tax that can be deducted is the actual amount paid during the year. This can be determined by the larger of the following:

(1) Actual receipts for purchases OR
(2) The amount from the IRS’s income-based table PLUS sales tax paid when purchasing motor vehicles, boats, and other items specified by the IRS.

Spousal IRA

If one spouse works and the other does not, the tax law allows the non-working spouse to base his or her contribution to an IRA on the working spouse’s income. Taxpayers frequently overlook this benefit when spouses have worked for years and based their individual contributions on their own income. Then, one of the spouses retires. Even if the working spouse has a pension plan at work and his or her income precludes making a deductible IRA contribution, the non-working retired spouse may still make a contribution based on the working spouse’s income.

Spousal contributions can also be made to Roth IRAs if the spouses’ joint income does not exceed IRS limits. As of 2020, the law changed so that no age limitation exists for making contributions to IRAs.

Economic Impact Payment

If you qualified for an economic recovery payment, in either the first or the second round, and did not receive the amount you should have, you can claim the underpayment on your 2020 tax return as a tax credit.

Economic Impact Payment document

If you received an economic impact payment, you should have received a Notice 1444. This documents the payment you actually received. The IRS has requested that taxpayers keep this form with all other important tax records, including W-2s from employers, 1099s from banks and other payers, and other income documents and records, to support their tax deductions.

Reinvested dividends

If you are invested in a mutual fund, you are probably reinvesting the annual dividends. Reinvested dividends add to the basis of your investment. So, when you sell the mutual fund, having a higher basis will reduce the gain. Mutual funds require tracking of your basis for mutual fund shares purchased after 2012. Some even track the basis and reinvested dividends going further back. However, some do not. It would be your responsibility to track the reinvested dividends so that you get the benefit of all reinvested dividends when you sell.

Worthless stock

If you are like most investors, you occasionally will pick a loser that declines in value. Sometimes, a security can even become totally worthless when the issuing company goes out of business. Whatever you do, don’t wait until it’s too late to claim your loss. If the IRS challenges the loss and the security is found to have become worthless in an earlier year, then the current year’s loss will be denied.

Lifetime Learning Credit

The American Opportunity Credit (AOTC) is the education credit most familiar to taxpayers because it is available for the first four years of post-secondary education and provides a higher credit. It also requires the student to attend the college or university on at least a half-time basis and to pursue a program leading to a degree or other recognized educational credential. On the other hand, the Lifetime Learning Credit (LLC) is available for all years of post-secondary education and for courses to acquire or improve job skills. The student doesn’t need to be pursuing a program leading to a degree or other recognized education credential, and it is available for one or more courses. Many individuals who do not qualify for the AOTC overlook the LLC.

Charity volunteer tax breaks

Did you volunteer your time for a charity or governmental entity during the COVID-19 pandemic? Then you probably qualify for some tax breaks. These rules actually apply to all charity volunteers, not just COVID-19 volunteers. Although the IRS doesn’t allow a tax deduction for the value of services performed for a qualified charity or a federal, state, or local governmental agency, the IRS permits some deductions for out-of-pocket costs incurred while performing the services, such as away-from-home travel, lodging, and meals; automobile travel; and uniforms.

Self-employed travel expenses

If you are self-employed and travel for business, don’t overlook highway tolls, porter fees, airline baggage fees, tips, taxi fares, Uber fees, car rentals, laundry, cleaning, or other incidentals while away, in addition to the normal meal, lodging, and transportation expenses.

Self-employed health insurance deduction

A self-employed individual (or a partner or a more-than-2%-shareholder of an S corporation) can generally deduct, as an above-the-line expense, 100% of the amount paid during the tax year for medical insurance on behalf of themselves, their spouse, and their dependents limited to the self-employed taxpayer’s net income from self-employment.

However, no deduction is allowed for any month when the self-employed individual is eligible to participate in a subsidized health plan maintained by an employer of the taxpayer, the taxpayer’s spouse, any dependent, or any child of the taxpayer who hasn’t attained age 27 as of the end of the tax year. The term “subsidized” means that the employer pays at least 50% of the coverage’s cost.

You cannot also claim the health insurance premiums claimed as an above-the-line self-employed health insurance expense as a Schedule A medical expense.

Summer camp

Are you single and working, or married and both you and your spouse work? Did you know that the costs of day camp during the summer generally count as expenses toward the child and dependent care credit allowing you to work? A day camp or similar program may qualify even if the camp specializes in a particular activity, such as soccer or computers. The credit ranges from 20% to 35% of the day camp’s cost, not exceeding $3,000 for one child or $6,000 for two or more. Overnight camps do not count.

Medical dependent

If you itemize your deductions, you can deduct medical expenses paid for certain individuals who are not your dependents. One such situation involves divorced parents, in which the non-custodial parent can deduct medical expenses they pay for their child, even when the other parent claims the child as a dependent. Another situation, which we refer to as a medical dependent, involves paying the expenses for someone who would qualify as your dependent except that their gross income is too much, which disqualifies them. For 2020, the gross income limitation is $4,300.

Example– The taxpayers’ adult son was seriously injured in a motorcycle accident and did not have medical insurance. His parents paid all of his medical expenses for the year. Their son meets all of the dependent qualifications, except that his gross income of $20,000 is too much, which disqualifies him. However, under the exception, they can still include his medical expenses on their 1040 Schedule A.

Income in respect of a decedent (IRD)

One of the most overlooked tax deductions is what is referred to as the IRD deduction. IRD is the acronym for income in respect of a decedent. IRD income is income that is taxable to the decedent’s estate and also taxable to the estate’s beneficiaries. Thus, it is double taxed; as a result, the beneficiaries generally receive a deduction equal to the difference between the decedent’s estate tax figured with and without the taxed income. Beneficiaries will only have this deduction if the decedent’s estate was large enough to be subject to the estate tax.

Have questions about how these or other tax issues apply to your particular tax circumstances? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.

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