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When it comes to your taxes, no one wants to pay more than they have to. And while the tax law provides plenty of tax deductions and credits, many go unclaimed at tax time.
Whether you are a parent, teacher, small business owner, or simply trying to find ways to cut your tax bill, here are five overlooked and popular tax breaks that cut your tax bill.
Tax day is Monday, May 17, so you still have time to take advantage of these overlooked and popular tax breaks.
Bad Debt Expense Deduction
Does someone owe you money from a loan you provided? Did you pay a home contractor to perform work, but they did not complete the task?
If you made a legitimate effort to get your money back, such as written requests and phone calls to request your money, the Internal Revenue Service (IRS) will allow you to claim a nonbusiness bad debt deduction. A nonbusiness bad debt is anything other than a loan to clients, suppliers, distributors or employees; credit sales to customers or business loan guarantees.
The IRS allows you to claim the deduction if you expect you have no chance of recovering your money. For example, you may think you won’t recover money from a person who owes you money and is experiencing financial hardships or a home foreclosure.
You would need to report the bad debt deduction on Form 8949, Sales and Other Dispositions of Capital Assets, Part 1, line 1, and attach a detailed statement to your tax return.
Your detailed statement should include:
- A description of the money owed to you
- The name of the debtor (the person or business that owes you money)
- A description of the business or family relationship between you and the debtor
- Any efforts you made to collect the debt
- Why you believe the debt is totally worthless
Self-Employed Health Insurance Premiums
Are you self-employed and pay health insurance premiums?
You may be able to deduct premiums, which may include medical, dental, or long-term care premiums. You can take the self-employed health insurance deduction for payments made for yourself and your family. The deduction is available for your children under the age of 27 even if you did not claim them on your tax return.
Your business must have a net profit to qualify for the deduction. A net profit is your business gross income minus your deductions. If you did not have a net profit, you can claim your premiums as an itemized deduction on Form 1040 federal tax return, Schedule A.
The IRS also allows owners who have an interest in a partnership and at least a 2% S-Corporation shareholder to claim the deduction. You can claim the deduction on Schedule 1 of your Form 1040 on line 16.
Summer Camp Expenses for Your Kids
Summer camps are costly, but there may be some tax relief to help offset the costs. The IRS allows you to claim the child and dependent care credit for qualified expenses, such as summer camps, while you or your spouse work (or search for work). Your child must be under the age of 13 (unless they are physically or mentally incapable of taking care of themselves).
The credit not only allows you to take a deduction for summer camps, but you may also claim the credit for:
- Education expenses. Payments made to a nursery, preschool or other programs below the level of kindergarten.
- Before and after school care. Amounts paid to care for your kids for before or after school care.
- Transportation costs. Amounts paid to a care provider for transportation to and from where the care is provided.
- Care outside of your home. The cost of care provided outside of your home paid to a dependent care center or a qualified personal care provider.
It’s important to note that while summer camp expenses qualify, the credit is meant to help parents during standard work hours—so you cannot take a deduction for overnight camps.
For the 2021 tax year only, the American Rescue Plan increased the 2020 qualifying expenses from $3,000 to $8,000 per child (from $6,000 to $18,000 for two or more children).
For the 2020 tax year, there are no income limitations on who can claim the credit. The amount of the credit is based on a percentage of your total qualified expenses. Individuals who earn less than $15,000 can claim up to 35% of qualified expenses. Those who earn $43,000 or more can claim up to 20%.
For 2021, if you earn up to $125,000, you can claim 50% of qualified expenses. Also, the amount gradually decreases from 50% to 20% for income above $125,000 to $400,000 and ultimately phases out by 1% for every $2,000 above $400,000. You can claim the child and dependent care credit on Form 2441 of your Form 1040.
Teacher’s Educator Expense
Are you a teacher or educator and paid classroom expenses during the year? If so, you may be able to take a deduction on your tax return.
Kindergarten through 12th grade-eligible educators can claim up to $250 ($500 if you and your spouse file a joint return and are both educators) of unreimbursed expenses on their tax return. An eligible educator also includes a K-12 teacher, instructor, counselor, principal, or aide who works at least 900 hours a school year in an elementary or secondary school.
You can claim expenses you pay for books, supplies, computer equipment, classroom materials and other related expenses. You can also claim the deduction for any personal protective equipment (PPE), disinfectant, and other supplies used to protect against the Covid-19 virus purchased on or after March 12, 2020.
The deduction must be paid or incurred during the tax year and can be claimed on Form 1040, Schedule 1.
Personal Protective Equipment
Americans increased their purchase of PPE in 2020 to reduce the spread of the Covid-19 virus. The sales of PPE are expected to increase from $13.5 billion to an estimated $24.3 billion in 2024. Recently, the IRS announced that these purchases, which include masks, hand sanitizer and wipes are deductible as medical expenses on your tax return.
The IRS allows you to deduct the amount of total medical expenses that exceed 7.5% of your adjusted gross income (AGI). For example, if your AGI is $35,000 and you paid $4,500 in medical expenses, you can claim the amount that exceeds $2,625 ($35,000 x .075) on your tax return. In this case, you would be entitled to a deduction of $1,875.
To qualify, you would need to itemize your deductions on Schedule A of your Form 1040. You should itemize your deductions, which include medical, dental, charitable, mortgage interest, taxes, and other deductions if it is greater than your applicable standard deduction. Your standard deduction is based on your filing status, income, and other factors. In most cases, the 2020 tax standard deduction for a married filing joint taxpayer is $24,800. For a single and head of household filer, the amount is $12,400 and $18,650, respectively.