“I hate saving money” — said no one ever. That’s why this time of year you either love it, or you hate it. The federal income tax is one of the most complicated things created in our history. Luckily, we have experts that can lead us through the process of learning about useful tax deductions.
What is one way to save? Understanding tax deductions and credits. A tax deduction is the amount of money the IRS lets you subtract from your adjusted gross income. This makes your taxable income lower which in turn lowers your tax bill. A tax credit is a dollar-for-dollar reduction in your actual tax bill, and some credits are refundable (you can receive the credit as a refund if you earned no income). For example, if you owe $500 in taxes but qualify for a $1,500 credit, you will get a check for $1,000. Not all tax credits are refundable, but they can make a big difference in your tax bill than a deduction.
There are hundreds of different tax deductions and credits available, and here you will learn about some of the popular options people have used—because every dollar counts!
1. Student loan interest deduction: If you bored student loans to obtain your degrees you could deduct up to $2,500 from your taxable income if you paid interest on student loans during 2018. You can take advantage of this even if you don’t itemize and if you made less than $65,000. If you made more than $65,000, you can deduct a reduced amount of interest. Also, if you are making student loan payments while still in school—you can take advantage of this too.
2. American Opportunity Tax Credit: This refundable tax credit is for college students, and it lets you claim the first $2,000 spent on books, tuition, equipment, and school fees, and 25% of the next $2,000 for a total of $2,500. Students or parents can claim it for up to four years.
3. Lifetime Learning Credit: This credit applies to undergraduate, graduate, on-degree, or vocational students and there isn’t a limit on the number of years that you can claim it. With this credit, you can claim 20% of the first $10,000 you paid in tuition and fees, up to $2,000.
4. Child and Dependent Care Tax Credit: If you have a child under the age of 13, an incapacitated spouse/parent, or another dependent so you can work, you may qualify for a tax credit of 20-35% of up to $3,000 of expenses. If you have two or more dependents, the percentage applies up to $6,000 of expenses.
5. Charitable Donation Deduction: Give to a good cause, and if you itemize your taxes, you may be able to subtract the value of your charitable gifts. Depending on what you donate and whether your deductions meet specific requirements this could be beneficial.
6. 401(k) Contributions Deduction: If you invest in a 401(k), your contribution is fully deductible. In 2018, the most you could contribute to your 401(k) was $18,500. If you are 50 or older, you can contribute up to $24,500. Employer contributions are on top of this limit, and the limit is set by the IRS and can change each year.
7. Saver’s Credit: This credit percentage depends on your filing status and income. It can run from 10%, 20%, or 50% of a maximum contribution of $2,000 (or $4,000 married filing jointly) towards a traditional or Roth IRA.
8. Home Office Deduction: If you use your home office exclusively for business activities, you can write off utilities, rent, real estate taxes, repairs, maintenance, and other related expenses. However, you have to make sure that you qualify for this deduction and decide if you are going to take the simplified option of not deducting actual expenses and instead of $5 per square foot up to 300 square feet of space, or the regular method of measuring your actual business expenditures against residence expenditures. This can get tricky, and excellent documentation is necessary.
9. Residential Energy Credit: Thinking of installing solar panels as an alternative energy source? Take advantage of this credit and claim 30% of installation costs for systems placed in your home, 26% in 2020 and 22% in 2021. This credit expires on December 31st, 2021. Also, take a look at your state because additional credits may be available in your location.
Navigating the rules and exceptions that apply to different tax deductions and credits can be challenging. Whether you prepare your taxes yourself or find a professional, take some time to learn about which tax breaks would apply to your situation. You never know, a little education may make a significant impact on the amount of tax you owe or the refund you will receive.