There are many different ways to reduce your tax liability.
Educating yourself about which deductions are applicable to you is a great investment! Hiring a good accountant is a great way to start this, but only you know all the different facets of your finances, so equipping yourself with knowledge is the best way to ensure you don’t overpay on your taxes.
That is why I wanted to review some of my favorite tax deductions!
Let’s start off with Itemized Deductions.
This is probably a term you’re familiar with. You can either take the standard deduction OR you can itemize your deductions. The standard or itemized deduction reduces your income, and thereby the amount of money you pay taxes on. The standard deduction is set every year by the IRS and is a flat amount depending on your filing status (head of household, single, married filing jointly, etc) and number the number of people you’re claiming on your tax return. Itemized deductions are based on your particular finances and is derived from your qualified deductions. Most of us have items that would qualify for itemized deductions, but frequently those deductions don’t exceed the standard deduction. Whichever is higher will be the amount applied to your tax return.
My favorite Itemized Deductions:
- Home Mortgage Interest: The interest you pay on your mortgage is tax-deductible if you itemize. If you own a rental property, it doesn’t qualify under this section, but can be deducted from your rental income on Schedule E. Learn more here.
- Charitable Contributions: Some charitable contributions to qualified organizations are tax deductible. If you donate clothes to Good Will, ask them to write you a receipt for your donation! If you tithe to your church, keep records of your checks. This is a great way to give back, and reduce your tax liability. *Some donations are not eligible, like political contributions and contributions to individuals. Click here to learn more.
- Medical and Dental Expenses: This can be a hefty deduction for many people. You can deduct medical and dental expenses in excess of 7.5% of your AGI. For instance, if you’re adjusted gross income (AGI) is $100,000 a year, and you have $10,000 in medical expenses, you can deduct $2,500 (the first 7.5% or $7,500 isn’t deductible). In this category you can also include transportation costs and up to $50/day, per person for hotel costs, if you’re out of town for an outpatient procedure. Click here for more details.
- Unreimbursed Employee Expenses: Work expenses that are incurred and unreimbursed as an employee that are ordinary and necessary may be deducted in excess of 2% of your AGI. Teachers who buy supplies for their classes can deduct them. You can also deduct work clothes and uniforms necessary for your position! Here is more info.
- Student Loan Interest: If you can manage to make it out of college without student loans, that is great!!! If you’re not so lucky, at least the interest on the student loans is deductible. Visit here to learn more.
My favorite Tax Credits:
Next I want to review my favorite tax credits! Tax credits work differently than deductions. Deductions reduce your taxable income, from which your tax is determined. Tax credits happen after your total tax is determined, and it actually reduces your tax. Tax credits, may have a much more significant impact on what you pay. Here are some frequently claimed tax credits:
- Child and Dependent Care Credit: If you have a small child in daycare or a dependent physically or mentally incapable of self-care, you can claim a tax credit. The credit depends on how much you paid for the care and your AGI. Visit the IRS page for more information on this credit.
- Education Credit: The Lifetime Learning Credit is a credit up to $2,000 for qualified education expenses for individuals enrolled in qualified higher education institutions. In addition, there is the American Opportunity Credit is a $2,500 credit for eligible undergraduate, degree-seeking students. This credit has an income cap. If you’re interested in learning the specifics, the IRS has them listed here.
- Earned Income Tax Credit: This is a credit for low to moderate income working individuals and families. Your AGI determines if you’re eligible for this credit. To determine if you qualify for this credit, visit the EITC Home Page on the IRS site.
There is so much to know about taxes, I can’t possibly cover all of the deductions and credits, but hopefully this gives you some ideas on what you can deduct!
**I am not a Certified Public Accountant, and cannot legally give tax advice. I am simply sharing what I have learned from classes and personal experience over the years. If you have specific tax questions, please visit a CPA.**
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