13 Clutch Federal Income Tax Deductions You Might Not Know About

U.S. tax code can often feel opaque and confusing. You have to choose which tax strategy will be most advantageous for you and your family. It can feel like a strange game in pursuit of a “high score” when trying to tally up your possible deductions. 

 

To help with your tax code exploration, but also just as a fun reminder of how bizarrely detailed the tax code is, here are several surprising federal income tax deductions that are available.

 

But first, a quick primer. But before we dig in, take a few minutes and familiarise yourself with the 5 types of income the IRS wants you to know so you don’t miss out on $4,000 deduction as we did. 

 

 

Tax reductions

The government allows deductions for a few reasons. It allows them, in effect, to subsidize activities that they deem to be valuable. Plus, tax reductions, at least in theory, allow the government to stimulate the economy — since taxpayers will have more money left over to reinvest into local businesses.

 

Tax reductions are also a positive talking point that politicians can use when they’re running for re-election since their constituents enjoy paying fewer taxes. Democrats and Republicans may disagree on how federal money should be spent, but everyone likes keeping more of their income when possible.

 

 

Standard deduction vs itemizing

On your federal income tax, you have the choice of two methods of lowering your taxable income — the standard deduction or itemized deductions. The standard deduction is a fixed amount, based on your specific life circumstance and what the IRS considers your role to be. Itemized deductions, alternatively, allow you to list out qualifying expenses that you’ve had throughout the year. 

 

Of course, you’ll want to choose whichever option legally allows you to deduct the most from your income — and therefore allows you to pay less taxes. 

 

Since the Tax Cuts and Jobs Act (TCJA) that went into effect beginning in 2018, an estimated nearly 90% of Americans are now better off choosing the larger standard deductions.

 

The IRS announced adjustments for inflation, so for the tax year 2019, the standard deduction is now $24,400 for married couples filing jointly (up from $13,000 in 2017 before the TCJA). It’s $18,350 for heads of household (up from $9,550 in 2017). And it’s $12,200 for singles (up from $6,500 in 2017).

 

Update yourself on the new tax changes the IRS made in 2019 and how it affects your pocket.

 

Itemizing will still be best for some

You should always maximize your allowable tax credits, whether you are still working, semi-retired, or fully retired. Especially for higher earners (like many in the medical field), itemizing may still be the best option.

 

To possibly tip the scale, I want to share 13 federal income tax deductions you might not have been aware of. 

 

Normal charitable donations, the child tax credit, student loan interest, and home mortgage interest deductions are often talked about, so I won’t mention them in my list today. Of course, those can all add up significantly if you are choosing to itemize.

 

Each of the deductions below has specific rules and exceptions and may change year-to-year, so I recommend speaking with a tax professional before making any final decisions.

 

Here are the clutch, surprising ways you can save on your income taxes for 2019.

 

 

1. Alcoholism and drug abuse treatment 

According to the IRS, you can deduct “the amount of your medical and dental expenses that is more than 7.5% of your AGI [Aggregate Gross Income].” This includes treatment for drug or alcohol addiction — even expenses for transportation to Alcoholics Anonymous meetings. 

 

Any form of addiction is, of course, a serious matter that is worth treating. It’s actually comforting, though, that people seeking treatment can get a small tax break while they’re working to improve their lives in this way.

 

2. Whaling captain expenses

In contrast, this possible deduction feels very specific and it’s more difficult to understand the rationale.

 

If you qualify, you can “deduct as a charitable contribution any reasonable and necessary whaling expenses you pay during the year to carry out sanctioned whaling activities. The deduction is limited to $10,000 a year. To claim the deduction, you must be recognized by the Alaska Eskimo Whaling Commission as a whaling captain charged with the responsibility of maintaining and carrying out sanctioned whaling activities.”

 

But, on the off chance that you are an Alaskan whaling captain, that’s some very good news!

 

3. Swimming pool (if medically required)

The IRS does not allow a tax deduction for acquiring a swimming pool if it is only to be used for general health or recreation purposes. But you’re not out of luck if you can show that the swimming pool is medically required.  “If you can show that the pool is specially equipped to alleviate your condition and is not generally suited for recreation, the IRS will likely allow the deduction.”

 

4. Adoption 

Adopting a child this year? Adoption can be expensive, but the federal government offers some relief. As of 2018, you can claim “up to $13,810 in adoption costs per child.”

 

In my view, adoption is an activity that benefits all involved parties. This deduction seems like an example of the tax code working correctly to incentivize a valuable societal function. 

 

5. Business sole proprietorship 

Do you run your own business? If your ownership form is a sole proprietorship (rather than an LLC, S-Corp, or C-Corp), you and your business are a single entity as far as the IRS is concerned.

 

You can deduct business expenses (start-up costs, recurring expenses, business travel, etc.), 50% of self-employment taxes, and your family’s health insurance cost. 

 

According to TurboTax, regarding the sole proprietorship health insurance deduction, “you can take this deduction even if you don’t itemize deductions on your tax return. The health insurance deduction is an ‘above-the-line’ deduction, meaning it is taken off your gross income before you reach your adjusted gross income. Other deductions, such as itemized deductions, are ‘below-the-line’ deductions.”

 

6. Gambling losses

While I don’t recommend gambling as a productive financial strategy, if you “have a friend” who likes to go to the casinos, they may be happy to learn about this possible deduction. You can deduct losses up to the amount of your winnings.

 

7. Education expenses

The American Opportunity Credit and the Lifetime Learning Credit allow students to claim up to a $2,500 deduction on their tuition, books, equipment, and fees. Your tax software or accountant can help you decide which of the two credits will be most beneficial.

 

8. Friends or family that don’t pay you back (bad debt)

In addition to bad business debt, the IRS also allows you to deduct bad “nonbusiness” debt. So, while it may hurt to not receive repayment, you can at least salvage some tax relief.

 

9. State and local taxes

You can deduct up to $10,000 in state and local taxes — this includes property, income, and sales taxes. Anyone using the deduction can include property taxes, but you must choose between deducting income or sales tax.

 

For most people, the state and local income tax will be higher, but the sales tax deduction option is beneficial if you live in a state without an income tax.

 

10. Other homeownership-related expenses

In addition to your primary mortgage interest, there are other homeownership-related expenses that you can deduct from your federal income taxes.

 

State and local taxes on your property (mentioned above), interest on home equity loans (if you’re using the loan to “substantially better” your home), and some closing costs on the purchase of your home are all tax-deductible. 

 

11. “Charitable donations” you might not have thought of

You may know that you can write off money given to a non-profit, but, you don’t necessarily have to stroke a check to qualify for a charitable donation deduction. In fact, if you’re fostering a pet for a non-profit, your expenses may be deductible. 

 

You can also deduct “charitable mileage” for distances driven while serving a non-profit. 

 

12. Retirement savings

I strongly encourage my readers to get the full retirement contribution match from their employer. In addition to the match, many retirement account types are also tax-deductible — this includes contributions to an HSA, IRA, 401(k), 403(b), or 457(b). 

 

This is a good time to read our ultimate guide to 401k, where we discussed the types of retirement accounts and how to get the most out of your 401k. 

 

Adequately preparing for your retirement years is important on its own, but it’s extra nice when you’re able to optimize your account types to minimize taxes.

 

13. Donations to charity from your IRA

Once you reach age 70½, you can make tax-deductible charitable contributions from your IRA to qualifying charities. These IRA-based charitable contributions are super tax-efficient because your money was tax-deductible in the year you contributed to your IRA, and now it will be tax-deductible when you take the distribution.

 

Better yet, these qualified charitable distributions count towards your required minimum distribution and are always tax-deductible, even if you take the standard deduction. 

 

I hope these surprising tax deductions inspire and equip you to save more on your taxes this year!