The 2020 tax return filing deadline for most U.S. taxpayers literally is just days away. If you're scrambling to meet the May 17 due date, don't be in such a hurry that you cheat yourself out of some tax savings.
You can claim deductions, either by itemizing if that gives you more than your standard deduction amount or by claiming some income adjustments, most of which are still referred to (by me, at least!) as above-the-line deductions, that reduce the amount of income that's taxed.
There also are tax credits, which are even better because they directly reduce what you owe Uncle Sam dollar-for-dollar. In some cases, credits even could get you a tax refund.
Too often, though, filers overlook too many of these tax breaks. Here are 12 that tend to fall into that category.
1. Earned income tax credit (EITC): This credit is intended to reduce the amount of tax owed for low- and moderate-income wage earners. However, only 4 out of 5 eligible taxpayers every year claim the EITC, according to the Internal Revenue Service. That's too bad. For the 2020 tax year, it could mean a tax credit of up to $6,660 for taxpayers with three or more qualifying children. Even those who are EITC-eligible but don't have kids could get up to $538. If you're in-between those family sizes, the EITC could mean thousands of dollars in tax breaks.
Even better, this dollar-for-dollar tax bill reducing break also is refundable. That means if it zeros out what you owe and there's some EITC left over, you get it back as a tax refund. So definitely check it out.
This filing season, there's also a way to make the most of the EITC. To claim it, you must have earned income, but not too much. The goal is to legally hit the EITC earnings sweet spot where you can get the maximum credit amount. Lots of workers in 2020, however, saw most of their income evaporate as businesses reduced workers' hours or closed completely. That means using 2020 earnings won't get them as much EITC. Because of that income disparity, the IRS says you can choose to use either your 2019 or 2020 income to claim the EITC.
2. Dependent care costs: Ask any mom or dad about the cost of raising a family and they'll tell your that one of the biggest expenses is paying for someone to watch after their youngsters while the parents are at work. And while many parents took over child care since they were, due to COVID concerns, working from home, some still looked to outside help to enable them to do their displaced jobs. If you paid for such offspring oversight, don't overlook the Child and Dependent Care Credit. This tax break (note that it's one of those valuable directly tax-reducing tax credits) covers up to $3,000 spent on care for one child or up to $6,000 for the care costs two or more kids. The actual tax credit you can get is a percent of those care costs based on your adjusted gross income.
If COVID vaccinations and workplace safety protocols mean you've gone back into the office this year, be sure to hang onto child care receipt, including day camps that are starting to re-open. The Child and Dependent Care Credit's value has been enhanced thanks to the American Rescue Plan Act for the 2021 tax year.
3. Deductible IRA contributions: Some taxpayers who contribute to a traditional IRA may be eligible to claim all or a portion of their contributions as a deduction. This is an easy way to make a sizeable reduction to taxable income while also planning for your post-work years. Even better, you have until the May 17 deadline to establish and put money into one of these retirement accounts for the prior tax year. Best of all, it's another above-the-line deduction. The amount you can contribute is adjusted annually for inflation. For the 2020 tax year, it can be as much as $6,000 if you're younger than 50 or $7,000 if you've hit or are beyond the half-century mark.
4. Retirement savings credit: If you can put some money into an IRA, traditional or Roth version, or a workplace or self-employment retirement plan, you also might be able to get a bonus tax break. The Saver's Credit is available to lower- and middle-income earners who contribute to retirement savings. It's worth up to $1,000. And because it's such a great tax advantage, I've got to keep repeating myself. That amount, since it's a tax credit, means a dollar-for-dollar reduction of any tax you owe.
5. Lifetime learning lessons: Parents of college students usually catch the tuition and fees above-the-line deduction. It's right there in atop the adjustments to income on Schedule 1. If it helps you reduce your 2020 tax bill, be sure to claim it this year. It's the last time you'll be able to use this tax break since it expired at the end of last year.
But don't despair, for 2021 you can use the Lifetime Learning Credit to account for many of these same educational expenses. This is a good option because the federal funding and COVID relief law enacted on Dec. 27, 2020, increased the income phaseout thresholds for the Lifetime Learning Credit, meaning it will be available to more taxpayers.
Better still, it's a tax credit. The direct reduction of tax you owe could be as much as $2,000 in 2020 and as much as $2,500 per student in 2021.
And best of all, this tax break lives up to its lifetime appellation. The Lifetime Learning Credit covers lessons for students of all ages, including those of us in the working work who are taking some continuing ed classes to improve our on-the-job skills. If you took such classes in 2020, be sure to take advantage of this credit now and claim them on your current return.
6. Teacher classroom expenses: noting the PPE inclusion — If you're one of those who dispenses knowledge to eager students, you're probably well aware of this above-the-line deduction that helps you get some tax payback for your out-of-pocket classroom expenditures. Full-time K-12 teachers can deduct up to $250 in out-of-pocket classroom expenses as an above-the-line deduction. If spouses are both teachers and filing a joint return, the deduction can be as much as $500. This year, though, don't overlook the new list of items that qualify here. Safety concerns prompted by the coronavirus pandemic prompted the IRS to add personal protective equipment (PPE) to the allowable classroom expenses list.
7. Larger standard deductions for older filers: Most people claim the standard deduction, especially since the Tax Cuts and Jobs Act (TCJA) greatly increased those amounts. Your exact standard deduction amount is based on your filing status. But a couple of other factors can come into play here.
Older, as well as visually impaired taxpayers of any age, generally can claim additional standard deduction amounts (starting at $1,650 more) just by checking boxes on Form 1040 or by filing the new Form 1040-SR created especially for senior citizen taxpayers.
8. Donations directly on Form 1040: You regularly donate to good causes, but don't itemize at tax time. This year, the IRS has just the tax break for you. A provision in the Coronavirus Aid, Relief and Economic Security (CARES) Act allows taxpayers who do not itemize to claim a deduction of up to $300 for charitable contributions made last year directly on their Form 1040. This applies to all taxpayers regardless of filing status.
And it gets better for the 2021 tax year. The government spending/coronavirus relief law enacted late last December doubles the direct $300 charitable deduction amount to $600 for married couples who file a joint tax return.
9. Charity-related miles: If it's more tax worthwhile to claim your charitable gifts as itemized expenses, make sure you don't miss out on any charity-related miles. You can count that travel distance at 14 cents per mile among your charitable gifts on Schedule A. Also be sure to include the amounts for receipts for parking and tolls. These miles could add up, for example, if you used your car to help the local food bank or prepared meals for the homebound groups deliver to those in need.
10. Donated retirement money: Sticking with the philanthropic theme, here's one for generous older individuals who did a great job saving for retirement. In fact, you're discovering you don't really need all that cash you socked away for your golden years. But the IRS still wants you to take out this money as a required minimum distribution (RMD), which now kicks in when you turn 72 instead of 70½.
You can avoid those RMD taxes by donating up to $100,000 a year of your required withdrawal to an IRS-approved charity. You can even start doing so at your 70½ birthday. That giving age wasn't changed when the RMD trigger was extended. Just make sure you do so as a direct transfer, known as a Qualified Charitable Distribution or QCD, to the charity. You can't deduct these QCDs, but the donations meet RMD rules, meaning the gift isn't included in your adjusted gross income and therefore isn't taxable income to you.
11. Self-employment tax breaks: Job shake-ups due to the coronavirus pandemic pushed more of us into alternative work areas. We took side gigs or became full-time, being-the-boss entrepreneurs. Not only do these enterprises, part-time or permanent, offer more freedom, the tax code provides some breaks we should claim at filing time.
If you pay for your medical insurance as a self-employed worker, be sure to deduct that as an above-the-line deduction found on Schedule 1. Ditto for half the self-employment (SE) tax you pay. And don't forget about retirement. You can several self-employed retirement plan options. As noted in overlooked tax break #4, these contributions also count toward the Saver's Credit.
There also are a slew of expenses you, as a sole proprietor of one full-time or many side hustles, can claim on your Schedule C for each.
12. Many medical deductions: OK, maybe this is a bit of cheating, but not the kind that will get you in trouble with the IRS. I'm lumping a lot of medical costs into this final overlooked tax break item, which applies to folks who itemize because they have a lot and often large medical expenses.
To do so, their medical expenses must exceed at 7.5 percent of adjusted gross income. These can help them (and maybe you) clear that hurdle.
Allowable deductible medical costs you can count range from medical miles that can be claimed in 2020 at 17 cents each to certain health insurance premiums to many more discussed in my look at IRS-approved deductible medical expenses, as well as some often overlooked (yes, doubling down here) deducible medical expenses. New to the list for 2020 claims is coronavirus-related personal protective equipment.
It might take a bit more time and work to claim some of these overlooked tax breaks. If you use tax software or hire a tax preparer to help with your taxes, they should catch these listed here if you qualify. But it never hurts to know what to look for and discuss with your tax pro.
In most cases, these deductions and credit definitely make it worth the extra filing trouble to save some (and sometimes, a lot of) tax dollars.