The Most Overlooked Tax Deductions That Can Save You Thousands (2025 Guide)

Introduction

Many taxpayers miss out on valuable deductions simply because they don’t know they exist. The IRS tax code allows for several deductions that can reduce taxable income, but failing to claim them means paying more than necessary. This guide covers the most overlooked tax deductions, relevant tax codes, and step-by-step instructions to help you claim them.

State and Local Sales Tax Deduction (IRC §164(b)(5))

Most taxpayers deduct state income taxes, but an alternative option is to deduct state and local sales taxes instead. This benefits those living in states without an income tax, such as Florida, Texas, and Nevada.

How to Claim:

• Use Schedule A (Form 1040) to itemize deductions.
• If you made a major purchase (e.g., a car or home renovation), add the sales tax paid to your deduction.
• Use the IRS Sales Tax Deduction Calculator to determine your eligible deduction.

Example:
John, a Texas resident, purchased a car for $30,000 and paid $2,475 in sales tax. Instead of deducting state income tax (which Texas does not have), he deducts the $2,475 sales tax on Schedule A, reducing his taxable income.

Student Loan Interest Deduction for Parents (IRC §221)

If you’re a parent who made student loan payments for your child, you might qualify for a deduction even if the loan is in your child’s name.

How to Claim:

• Deduct up to $2,500 of student loan interest using Form 1040, Schedule 1.
• The IRS treats this as if you gifted the money to your child, allowing you to claim the deduction.
• Income limits apply: Phase-out begins at $75,000 for single filers and $155,000 for married filing jointly in 2025.

Example:
Lisa paid $1,800 in student loan interest for her son. Even though the loan is under her son’s name, she claims the deduction on Schedule 1, lowering her taxable income by $1,800.

Medical Expenses for Dependents (Including Parents) (IRC §213)

If you pay for a parent’s or dependent’s medical expenses, you may be able to deduct them—even if they don’t live with you.

How to Claim:

• Use Schedule A (Form 1040) to deduct medical expenses exceeding 7.5% of AGI.
• The dependent must meet IRS support requirements.
• Keep detailed records of payments and medical receipts.

Example:
Sarah, whose AGI is $50,000, paid $6,000 for her mother’s medical care. Since her qualified expenses exceed 7.5% of AGI ($3,750), she can deduct $2,250.

Home Office Deduction for Self-Employed Individuals (IRC §280A(c))

Employees working remotely for an employer do not qualify for the home office deduction. However, self-employed individuals can claim it if they use a portion of their home exclusively for business.

How to Claim:

• Use Form 8829 (Expenses for Business Use of Your Home) if you’re self-employed.
• Calculate your home office percentage (square footage of office ÷ total home area).
• Deduct direct expenses (e.g., office furniture) and indirect expenses (e.g., utilities, rent, mortgage interest).

Example:
Tom, a freelance graphic designer, uses 200 sq. ft. of his 2,000 sq. ft. home for work (10%). His home expenses are $12,000 annually. He can deduct $1,200 (10% of $12,000) as a business expense.

Educator Expenses Deduction (IRC §62(a)(2)(D))

Teachers and eligible educators can deduct up to $300 in classroom expenses—even if they don’t itemize.

How to Claim:

• Use Form 1040, Schedule 1 to claim the deduction.
• Keep receipts for school supplies, books, and technology purchased out-of-pocket.

Example:
Mark, a high school teacher, spent $400 on classroom supplies. He deducts $300, reducing his taxable income without needing to itemize.

Step-by-Step Guide to Claiming Overlooked Deductions

1. Gather Records: Keep receipts, statements, and tax documents (e.g., Form 1098-E for student loan interest).
2. Choose Between Standard or Itemized Deduction: Use Schedule A if itemizing.
3. Fill Out the Right Forms: Depending on the deduction, complete Schedule A, Form 8829, or Schedule 1.
4. Check Phase-Out Limits: Many deductions have income caps.
5. File Electronically: Use tax software or consult a CPA for accuracy.

Conclusion

Many taxpayers miss out on deductions they qualify for. Reviewing available deductions, keeping records, and consulting a tax professional can help reduce taxable income and increase refunds.

Need help? Schedule a consultation with Anshul Goyal, CPA EA FCA to review your tax situation for 2025.

Disclaimer

This article is for informational purposes only and should not be considered tax, legal, or financial advice. Tax laws change frequently, and individual circumstances vary. Consult a qualified tax professional, such as Anshul Goyal, CPA EA FCA, before making any tax-related decisions.

FAQs

1. What is the most overlooked tax deduction?
Many taxpayers forget to deduct state and local sales tax, especially in states without an income tax.

2. Can I deduct home office expenses if I work remotely for an employer?
No, only self-employed individuals qualify for the home office deduction under IRC §280A.

3. Can I deduct medical expenses for my parents?
Yes, if you pay more than 50% of their support and meet the 7.5% AGI threshold under IRC §213.

4. Can I deduct student loan interest if the loan is in my child’s name?
Yes, if you made the payments on their behalf and meet the income limits.

5. What is the income limit for deducting student loan interest in 2025?
The phase-out starts at $75,000 (single) and $155,000 (married filing jointly).