When tax season rolls around, everyone is in the same boat with one goal in mind: minimizing tax liability with the hopes of receiving a refund. While it’s important to follow the rules and regulations set forth by the IRS, there are a variety of deductions and credits you can take advantage of.
You won’t qualify for every tax credit and deduction, but there are probably several you can use to improve the likelihood of receiving a refund. Note: it’s important to discuss these deductions and credits with your tax professional before taking advantage.
Do you make a mortgage payment every month? If so, it’s safe to say you pay a good amount of money in interest. Depending on your income, you may qualify for the mortgage interest deduction. On top of this, if you have private mortgage insurance, you can also deduct it on your income tax return.
Even though you need to itemize to claim this deduction, it’s well worth it for most people. Especially those who pay thousands of dollars in interest every year.
Student Loan Interest
It’s safe to say that no one enjoys repaying student loans, but it’s a way of life for many people. On the plus side, taxpayers with student loans can deduct up to $2,5000 per interest every year. In addition to student loans you pay for yourself, you can also deduct interest on those that you pay for a spouse or dependent.
Keep in mind that the amount you can deduct may decrease depending on your modified adjusted gross income.
Health Insurance Premiums (If You’re Self-Employed)
Speaking of being self-employed, you may pay for health insurance should you not receive it through another means, such as a spouse’s group policy. If you’re self-employed and you pay your own premiums, you can deduct the entire cost on your tax return. You can also include premiums you paid for your spouse, dependents, and any non-dependent children under the age of 27.
Note: you can also deduct dental insurance premiums.
Home Office Deduction
If you’re self-employed or work from home regularly for your employer, you’re permitted by the IRS to deduct a variety of expenses. These include but are not necessarily limited to the space that you use to work, renter’s insurance, utilities, rent, repairs, and maintenance.
Keep in mind that you’re only permitted to deduct costs associated with your workspace, not your home as a whole. For this reason, keep close track of where you work and the expenses that you incur throughout the year.
Half Of The Self-Employment Tax
Are you self-employed? If so, you know that the self-employment tax of 15.3% costs you quite a bit of money every year. Fortunately, the IRS allows you to deduct half of the self-employment tax. Here’s why: you can deduct the employer portion of FICA taxes, which is 7.65%.
Filing a tax return as a self-employed professional is never a walk in the park, but you’ll be glad every year that you’re able to deduct half of the self-employment tax.
When you gamble, you do so with the idea of winning money. However, like many, you end up on the wrong end of things. If you have gambling losses, you may want to look into deducting them along with other itemized deductions.
Doing this is easier said than done, however, as you need to track your losses while also claiming your gambling winnings as income. If you gamble often, it may make sense to implement a system for tracking your winnings and losses.
For many people, charitable deductions are a big part of their life (and budget). If this sounds familiar, keep track of all the contributions you make throughout the year, while also holding onto receipts.
Note: not all charitable contributions are tax-deductible, so check with each individual charity and your tax professional. This is also an itemized deduction, so it may not do much for you unless you made significant contributions during the tax year.
Health Savings Account Contribution
Many people use a health savings account (HSA) to save money for qualified medical expenses. Not only are these contributions deductible — much the same as the IRA deduction — but withdrawals are tax-free as long as you use the funds for qualified expenses.
If you have an individual high-deductible health insurance plan, you can contribute up to $3,550 in 2020. This increases to $7,100 if you have a family plan.
Do you drive for work? If so, and your employer doesn’t reimburse you for fuel expenses, you can deduct 57.5 cents per mile driven for business use.
As a taxpayer, you have another option: calculate the actual costs of using your vehicle, including fuel and maintenance, as opposed to using the standard mileage rate set by the IRS. This is more work, as you have to track all your expenses, but it’s an option to consider.
Child Tax Credit
If you pay the majority of care for a child under the age of 17, you may qualify for the Child Tax Credit. However, there are seven eligibility requirements that you must meet. These include age, relationship, support, dependent, citizenship, residence, and family income.
For example, the child must be under the age of 17 at the end of the tax year. Also, the child must be your own, a step-child, or a foster child. With so many requirements, you’ll want to discuss your eligibility with your tax professional.
If you have a traditional IRA, you can contribute up to $6,000 per year for 2020 (this is likely to change in the future). If you are age 50 or older, you can contribute an additional $1,000 per year to a traditional IRA.
The primary purpose of an IRA is to save for retirement, but there are other benefits to take advantage of along the way. For example, you can deduct the amount that you contribute from your taxes, thus saving you money now.
Do you work as a school teacher or some other type of educator? You know that there are times when you have to spend money on professional development, classroom supplies, or other items associated with your profession.
To qualify, you need to be employed as a K-12 teacher, principal, teacher’s aide, or counselor. If you fit this mold, you can deduct up to $250 for qualified expenses. It’s not the largest tax deduction, but you might as well take advantage of you qualify.
Child And Dependent Care Tax Credit
Here’s what the IRS has to say about this tax credit: You may be able to claim the child and dependent care credit if you paid expenses for the care of a qualifying individual to enable you (and your spouse, if filing a joint return) to work or actively look for work.
The total expenses you can use to calculate the credit cannot exceed $3,000 for a single individual or $6,000 for two qualifying individuals, such as spouses. If you spent any time seeking employment, keep track of your expenses so that you can take advantage of the Child and Dependent Care Tax Credit come tax season.
Medical Expense Deduction
As your medical expenses mount throughout the year, keep track of the total. If they exceed 7.5 percent of your adjusted gross income, you may be able to deduct them. However, there are a couple of things to keep in mind.
First off, you need to keep track of your expenses to ensure that your reporting is accurate. Secondly, you can only use the medical expense deduction if you itemize, so be sure it makes sense to do so.
American Opportunity Tax Credit
It’s expensive to get an education, but there are steps you can take to save. For example, the American Opportunity Tax Credit is worth up to $2,500 and is available for qualifying expenses associated with your first four years of higher education. Expenses include but are not necessarily limited to books, classroom supplies, and tuition.
Keep in mind that the American Opportunity Tax Credit phases out based on your income, so you’ll want to discuss your eligibility with your tax professional.
Lifetime Learning Credit
In many ways, the Lifetime Learning Credit is similar to the American Opportunity Tax Credit. However, there are some key differences, including the fact that it’s available for tuition and other expenses for undergraduate, graduate, and professional degree courses. Furthermore, you can take advantage of the Lifetime Learning Credit if you spend any money out of pocket for career development.
Note: you can claim the Lifetime Learning Credit as many times as you want, up to $2,000 per return. In order to receive the full credit, you must be able to prove a minimum of $10,000 in qualified expenses.
There is no denying the fact that adopting a child is an expensive endeavor. Fortunately, the IRS realizes this, which is why they created the Adoption Credit.
With this, you can take a tax credit of up to $14,080 in adoption costs per child. This can go a long way in offsetting some or all of the costs associated with adoption. The amount of the credit phases out as your income increases, and you’re not eligible if you earned more than $251,160 in the tax year in which you adopted the child.
Earned Income Tax Credit
As a low-income or moderate-income taxpayer, you may qualify for the Earned Income Tax Credit. For 2020, eligible taxpayers are able to claim a credit of between $538 and $6,660.
However, you’re only eligible if your adjusted gross income is less than $56,844 (married filing jointly) or $50,594 (Single, Head of Household, or Widowed). In some cases, a dependent can qualify for the Earned Income Tax Credit.
State And Local Taxes
The state and local tax deduction — also known as SALT — allows you to deduct a combination of property taxes, along with either state and local income taxes or sales taxes.
As a result of the Tax Cuts and Jobs Act (TCJA), this itemized deduction was capped at $5,000 for a married person filing separately and $10,000 for all others. This is an itemized deduction, so work with your tax professional to see if it suits your situation.
Residential Energy Credit
When making home repairs, consider the impact they can have on your tax bill. With the installation of some types of renewable energy, such as solar panels or wind energy, you may qualify for the Residential Energy Credit.
Depending on the upgrades you made, the Residential Energy Credit allows you to receive up to 30% of the installation cost. Note: if you plan on claiming the Residential Energy Credit, keep all receipts associated with the cost of installation.