Hitting the send button to e-file a tax return or dropping an envelope with completed forms in the mail is always a welcome relief, especially if a refund is expected. However, discovering that you missed taking a qualified deduction or suddenly learning you had a tax break you didn’t take advantage of can turn relief into frustration.

Both deductions and tax credits can make significant impacts in reducing or offsetting taxes owed, but taxpayers must first find out whether they qualify for certain tax breaks and not assume they’re covered.

“With tax reform on the agenda for 2017, several tax deductions and credits might be sacrificed in order to lower tax rates, so make sure that you claim all of the tax breaks to which you are entitled before they disappear,” said Mark Luscombe, JD, LLM, CPA and Principal Federal Tax Analyst for Wolters Kluwer Tax & Accounting. “Consulting a tax professional about potential deductions and credits that you may not be aware of is a good idea, but it pays to do a little research ahead of time so you know what to ask about.”

Need-to-know Tax Deductions and Credits Checklist

___ Home Office Deduction – A simplified safe-harbor method for this deduction was introduced in 2013 for those who are self-employed and work out of their homes. It is based on the size of home office and is designed to be a simple calculation.

Here’s how it works: Eligible taxpayers can deduct $5 for every square foot of workspace used – up to a maximum of 300 square feet. So, if you use a den or spare bedroom at home as your home office and it measures 18 X 15 feet for a total of 270 square feet – multiply that by $5 for a total home office tax deduction of $1,350.

The simplified safe-harbor option saves time compared to the standard home office tax deduction calculation of figuring related expenses and how they are apportioned over the course of the year to a home office. One taxpayer-friendly benefit is that one may choose which calculation, either the safe-method or the standard method, to use each year to provide the largest tax deduction.

___ Mortgage Interest Deduction – As a result of a recent court decision, the IRS has changed its position and now allows the mortgage interest deduction limits to be applied on a per taxpayer rather than a per residence basis. This means that two unrelated owners of a home can now each claim a mortgage interest deduction related to up to one million dollars in mortgage debt related to purchase, construction or improvement of the home and up to $100,000 for a line of credit secured by the home.

___ Mortgage Debt Exclusion – The PATH Act, enacted in December 2015, prevents forgiveness of mortgage debt from suddenly being counted as additional taxpayer income, since the mortgagor no longer is making payments on the forgiven portion, but not pocketing the savings in cash. Those who qualify may benefit on a principal residence of up to $2 million ($1 million for a married taxpayer filing a separate return) through 2016. The Act also modifies the exclusion to apply to qualified principal residence indebtedness discharged in 2017 if the discharge is made under a binding written agreement in 2016.

In other words, taxpayers who enter into a foreclosure, short sale or home loan adjustment in writing before December 31, 2016, but do not complete the transaction until after January 1, 2017, may qualify for the exclusion. Because the forgiven portion is not considered added income, taxpayers will not vault into a higher tax bracket or be taxed on that amount within their current bracket.

___ Home Mortgage Insurance Premium Deduction – It’s one of the more popular deductions that was extended through 2016 with passage of the PATH Act — allowing most homeowners to write off their home mortgage insurance premium as interest paid on a mortgage. Taxpayers can deduct mortgage interest paid on their primary home and on a second or vacation home. In addition, mortgage interest on a line of credit or home equity loan, which is secured by the home, is also deductible.

___ Charitable Donations – Taxpayers who donate money or non-cash property to qualified charities may be entitled to a tax deduction. While charitable gifts via a check may be easiest to track, a receipt or official acknowledgement of the donation from the charitable organization is a mandatory requirement for tax reporting.

Additional documentation is required to establish the fair market value of non-cash items. Also:

  • Travel expenses associated with charitable volunteer activities may also be tax deductible.
  • Charitable donations may be limited based on a percentage of adjusted gross income (AGI) depending on the type of organization and property donated.

___ Medical, Dental Expense Deductions – Expenses related to diagnoses and treatment of medical and dental conditions may also be deducted from your income taxes, depending on how much you paid out of pocket compared to how much you earned.

The general rule is that qualified medical and dental costs that exceed 10 percent of a taxpayer’s AGI may be deducted (7.5 percent for people age 65 or over before January 1, 2017). Typical expenses may include unreimbursed medical and dental bills, and the unreimbursed costs of equipment, supplies and devices prescribed by a physician or dentist for use in treating a condition.

___ Medicare Premium Deductions, Self-Employed – Business owners and self-employed taxpayers may deduct health insurance premiums. Those who are old enough to qualify for Medicare and are also business owners or self-employed may deduct premiums paid for Medicare Part B, Part D and supplemental Medicare policies to guard against health care coverage gaps. However, the deduction is not available for anyone who is already covered under their or their spouse’s employer’s health plan.

___ Business Expense Tax Deductions – For sole proprietors, self-employed workers, contractors and others incurring qualified business expenses related to their occupation, income tax deductions are available. In most cases, eligible business expenses must both be ordinary, something common and acceptable in that particular business, as well as necessary, something appropriate and helpful to the business or trade. The IRS requires that business expenses should be separated from other expenses used to figure the cost of goods sold, capital expenses and personal expenses. Furthermore, business expense deductions can only be taken once, either on an individual’s income tax return or a separate business tax return – but not on both.

___ Child Tax Credit – The maximum child tax credit of $1,000 per child age 17 or younger is now permanent. For taxpayers with nominal tax liability, a portion of the child tax credit may be refundable. However, the amount of the credit may be less, depending on income level.

___ Child and Dependent Care Credit – This credit may be claimed by eligible taxpayers who paid work-related expenses for the care of a qualifying individual in order for an eligible taxpayer to be able to work or look for employment. It is a percentage of the amount paid to a care provider and depends on a taxpayer’s AGI. A dependent child must be under 13-years-old when care was provided to qualify.

___ Adoption Credit – Newly adoptive parents are eligible to claim up to $13,460 per child for 2016 taxes ($13,570 for 2017). However, the credit decreases for those with a modified adjusted gross income (MAGI) of more than $201,920 ($203,540 in 2017). Plus, taxpayers with a MAGI of more than $241,920 ($243,540 in 2017) cannot claim the credit.

The adoption credit was also made permanent in 2013 and it’s the largest nonrefundable tax credit available to individuals. Those claiming the credit on their income taxes must file Form 8839, Qualified Adoption Expenses Documentation of qualified adoption expenses, including any adoption decree or court order, should be retained with copies of the tax return.

___ Earned Income Tax Credit (EITC) – The PATH Act made permanent the EITC increase ($5,000) in phase-out amounts for joint tax return filers. The Act also made permanent the increased credit of 45 percent for taxpayers with three or more qualifying children. Without the changes, both enhancements were set to expire in 2017.

The EITC is a refundable federal tax credit aimed at helping low and moderate income workers keep more of their paychecks. It was enacted in 1975 to offset Social Security taxes for those who qualify and as an incentive for more people to join the workforce. When the EITC exceeds the amount of taxes to be paid, it can then generate a tax refund for eligible taxpayers who claim the credit.

About Wolters Kluwer Tax & Accounting

Wolters Kluwer Tax & Accounting is a leading provider of software solutions and local expertise that helps tax, accounting, and audit professionals research and navigate complex regulations, comply with legislation, manage their businesses and advise clients with speed, accuracy and efficiency.

Wolters Kluwer Tax & Accounting is part of Wolters Kluwer N.V. (AEX: WKL), a global leader in information services and solutions for professionals in the health, tax and accounting, risk and compliance, finance and legal sectors. We help our customers make critical decisions every day by providing expert solutions that combine deep domain knowledge with specialized technology and services.

Wolters Kluwer reported 2015 annual revenues of €4.2 billion. The company, headquartered in Alphen aan den Rijn, the Netherlands, serves customers in over 180 countries, maintains operations in over 40 countries and employs 19,000 people worldwide.

Wolters Kluwer shares are listed on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. Wolters Kluwer has a sponsored Level 1 American Depositary Receipt program. The ADRs are traded on the over-the-counter market in the U.S. (WTKWY).