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- You’ve probably already thought about some tax deductions, but you might be missing some savings.
- If you made energy-efficient updates to your home, there are federal and state credits and deductions.
- If you paid interest on your student loans, you can deduct that amount at tax time.
It’s tax season again. As you gather your W-2s and prepare your return, your mind is likely focused on big-ticket items like mortgage interest, charitable donations, and childcare costs that can substantially lower your tax bill.
But some smaller, more specialized tax credits and deductions could score you hundreds (or even thousands) of extra dollars back as well. These “hidden gems” can be especially valuable depending on your situation.
Here’s an overview of some overlooked federal and state tax credits that filers often miss.
1. Green credits for energy efficiency and electric vehicles
To help promote sustainability and fight climate change, the federal government offers several tax incentives for households and drivers investing in energy-efficient upgrades or electric vehicles.
Home upgrades like installing high-efficiency HVAC systems, water heaters, solar panels, wind turbines, insulation, and more can qualify for credits that reduce what you owe on your taxes. The amounts and specifications differ based on the type of upgrade.
Similarly, purchasers of electric vehicles or plug-in hybrids may be eligible for credits of up to $7,500, depending on the car’s battery capacity. It’s important to note that these are tax credits, not deductions, meaning they directly reduce taxes owed instead of just reducing your taxable income.
Many states also supplement federal credits with additional rebates, discounts, or incentives for energy-efficient products and electric vehicles — and some are quite generous. For example, California offers thousands back on solar panels and electric cars through state agencies. Before investing in any major energy or auto upgrade, review the available federal tax credits and state incentives to ensure you’re eligible. Combined, these can potentially add up to major savings.
2. Health insurance premium deduction
If you’re a freelancer, you can deduct your health insurance premiums. This can be a huge deduction for self-employed individuals and small business owners who have to pay for health insurance on their own. Many freelancers choose to go without insurance due to the cost — knowing about this deduction can help lessen the financial blow.
Most employed workers have employer-sponsored health insurance contributions taken from their paycheck pre-tax — and those paying for their own plans do not. This levels the playing field a bit for the self-employed by making health insurance premiums pre-tax.
3. Student loan interest deduction
For better or worse, student loans have become synonymous with higher education. Up to $2,500 in interest paid on federal and many private student loans is deductible each year on individual returns subject to income limits. The deduction starts phasing out for $75,000 single filers ($155,000 for joint) and disappears when your income hits $90,000 single ($185,000 joint).
With ballooning college costs and record educational debt burdens, this write-off softens the blow for early-career grads working toward financial independence.
4. Credits for higher education
The lifetime learning credit is a federal tax credit worth up to $2,000 a year for tuition and educational expenses paid for eligible college, university, or vocational school students.
Unlike the more commonly known American opportunity tax credit, which is only available for the first four years at an eligible school, the lifetime learning credit is available for all years of your postsecondary education. You can also apply it to courses to acquire and improve job skills.
To qualify for the lifetime learning credit, you must pursue a degree or other recognized education credential. The credit covers tuition, enrollment fees, books, supplies, equipment, and other education expenses.
Unlike a deduction, which just reduces taxable income, this credit directly reduces the taxes you owe. But it’s not for everyone — this credit begins phasing out at $80,000 of modified adjusted gross income.
5. State and local tax deductions
This tax break allows you to take an itemized deduction for state and local general sales taxes instead of deducting state income taxes. At first glance, this might seem counterintuitive — why wouldn’t you deduct state income tax, which is usually a larger sum? The sales tax deduction makes sense for filers who live in a state with no income tax, such as Texas, Florida, or Nevada.
Even if your state has an income tax, you may still come ahead by itemizing sales tax instead, depending on your tax profile. The IRS provides tables and tools to calculate if claiming sales tax delivers more savings than claiming income tax.
If you’ve recently made a large purchase subject to sales tax, like a boat, car, or home renovation, this could help lower your overall income (and tax bill). Remember that the 2017 Tax Cuts and Jobs Act capped the combined total deduction to $10,000 per taxpayer.
6. Child and dependent care credit
If you pay for childcare for your child or dependent — like day camp, before or after school programs, preschool, or day care — for you to work, you may be eligible for the Child and Dependent Care Credit.
This credit covers up to 35% of $3,000 in care costs for one qualifying dependent ($6,000 for two or more dependents) and can be up to $1,050 per dependent.
There are income restrictions, including $200,000 for single filers and $400,000 for married filing jointly. But, this tax incentive can help offset the steep costs working parents pay for childcare.
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