By Marjorie L. Rand, CPA, CFP®, RICP®
Tax season has arrived—and the last thing you want after the inflation and volatility of 2022 is to pay more in taxes. If you don’t have an understanding of the complexity and intricacies of the tax code or knowledge of the new rules and regulations, it can be challenging to know what applies to your specific situation.
It may feel like a daunting task, but it doesn’t have to be. I offer my clients ideas and ways to save on taxes while helping them not pay more than they have to. One way is to take advantage of the many tax deductions available. Read on to understand the 6 most commonly overlooked deductions that can help you save big and make the most of your tax return.
1. Out-of-Pocket Charitable Contributions
There’s more to charitable deductions than many people realize. Not only are the big-ticket contributions deductible, but the out-of-pocket expenses paid while volunteering or donating your time are also deductible too.
For instance, if you participate in charitable activities that involve up-front expenses, these are fully deductible on your tax return. Whether you purchase canned goods for a food drive or supplies for a local school fundraiser, your contributions are deductible. If you drove your car for charitable causes in 2022, you can also deduct 14 cents per mile and the cost of tolls.
Remember to keep your receipts and obtain verification for any contributions over $250 to make sure all your bases are covered.
2. Self-Employment Tax Deduction
For self-employed individuals, you can deduct a portion of the Social Security and Medicare tax you pay. Since self-employed individuals are required to pay both the employer and employee portion of Social Security and Medicare tax, there is a tax deduction available for the portion considered paid by the “employer.”
The full tax is 15.3% of net earnings, but you can write off 7.65% using this deduction. The best part is that this is an above-the-line deduction, which means it can be used in conjunction with the standard deduction.
3. Student Loan Interest
Another above-the-line deduction that many people forget about is the student loan interest deduction. This deduction allows the borrower to deduct up to $2,500 of student loan interest paid over the course of the year, even if the loan is repaid by someone else.
Here’s an example. If you took out a Parent PLUS Loan for your child to attend school and they have been making the payments, you can still deduct whatever interest was paid on your tax return since you are technically the borrower. In this case, the IRS assumes that your child gave you the money, and then you paid the debt yourself, thus allowing the borrower (not the payor) to receive the tax deduction.
With student loan payments on pause for the last two years, many people will not qualify. If you have consistently made payments, or if you have paid down the interest portion on any of your student loans in 2022, make sure to claim this deduction if your modified adjusted gross income is less than the phase-out threshold.
4. Medicare Premiums for Self-Employed Individuals
If you’re over the age of 65, enrolled in Medicare, and continuing to run your own business, then you can deduct the premiums paid for Medicare Part B and Part D as well as the cost of any supplemental policies or the Medicare Advantage plan.
The good news is this is an above-the-line deduction, so you do not have to itemize and the premium costs will not be subject to the 7.5% AGI floor that typically applies to medical expenses. Note that you are only eligible for this deduction if you are not also covered by an employer health plan, whether that be through a second job or through your spouse’s employer.
The even better news is that even if you are not 65 and enrolled in Medicare, you can still deduct the cost of healthcare (and long-term care) premiums if you are self-employed and not covered by an employer health plan.
5. State Income Tax Refund
Many people automatically assume they are required to report a state income tax refund as income on their federal tax return. But this is not actually the case. If you did not itemize your deductions to claim the state income tax paid, then any refund received is not considered income at the federal level.
Since most taxpayers claim the standard deduction and do not claim state and local tax deductions, the majority of those who receive a state income tax deduction do not need to report it on their Form 1040. Keep this in mind as you file your taxes this year, and don’t mistakenly report more income than is rightfully taxable.
6. Moving & Travel Expenses for Military Personnel
When the Tax Cuts and Jobs Act was signed in 2017, many taxpayers lost the ability to deduct moving expenses on their tax returns. But this deduction is still available for active-duty military personnel. If you or your spouse were an active-duty military member who relocated in 2022 and you did not receive a reimbursement from the government for your move, you will be able to deduct move-related expenses including the cost of travel, lodging, moving supplies, services, and shipping.
What’s more, military reservists and National Guard members are also able to deduct the cost of work-related travel as long as the travel is overnight and more than 100 miles away from home.
Don’t Miss This Opportunity!
What’s listed here are just a few of the most commonly overlooked tax deductions available, but it’s possible that you may qualify for more depending on your unique situation. By working with a trusted professional who can advise you on your specific circumstances, you can gain the assurance that you are making the most of your taxes while preserving your wealth.
At Rand Financial Planning, I offer my clients personalized financial planning guidance and support to work toward a stable and fulfilling future while helping you navigate this tax season with ease and confidence. To get started, schedule a 20-minute introductory call or reach out to me at 908-895-2406 or firstname.lastname@example.org to see if I’m the right fit to help you on your financial journey.
Marjorie Rand is founder and financial advisor at Rand Financial Planning, a comprehensive, fee-only, fiduciary financial planning firm. Marge specializes in helping her clients plan for a secure retirement and navigate life’s many transitions through customized, tax-efficient retirement planning. She is passionate about empowering her clients to make the best financial decisions for their life and being by their side no matter what life throws at them. Marjorie spent many years as a CPA before founding Rand Financial Planning so she could be a go-to source for all her clients’ financial needs and help them avoid costly mistakes. She has a bachelor’s degree in accounting from Rutgers University and a Master of Science in Taxation from Fairleigh Dickinson University, along with the Retirement Income Certified Professional® (RICP®) and CERTIFIED FINANCIAL PLANNER™ certifications. When she’s not working, Marge enjoys boating, horseback riding, traveling, and hiking with her husband and her dog, Rangeley. To learn more about Marjorie, connect with her on LinkedIn.