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The most commonly overlooked credits and deductions.
20 March 2022
Have you ever desired to save money on taxes? Tax deductions and tax credits can be huge money-savers!
A tax deduction lowers your taxable income and reduces your tax liability. You can also get a credit or increase your tax refund by claiming various tax credits.
To help you save money, I put together a list of deductions and credits that are most commonly overlooked.
Out-of-Pocket Charitable Deductions
It's hard to forget the big charitable gifts you made during the year. But there are also small expenses that you can deduct for doing work for a charity. For instance, you can write off the costs of preparing and serving food for a soup kitchen or buying stamps for a school's fund-raising campaign. If you contributed more than $250, you'd need to provide a statement from the charity that says that you supported the organization. Also, deduct the money you paid for your car parking and tolls for charitable travel.
State Sales Taxes
This deduction can be significant if you live in a state that doesn't have an income tax. You can deduct a local or state sales tax or income tax. You choose whichever saves you the most money.
State Tax Paid for Previous Year
If you filed a state income tax return in the previous year, ensure to include the amount of tax you owe. This will allow you to deduct the amount on your federal return in the current year. You can also deduct your income taxes through estimated quarterly payments. If you're filing a joint return, the limit on the amount of state and local taxes you can deduct is currently $10,000 a year. If filing separately, it is $5000. However, this limit may change if the Build Back Better Act is passed.
Child and Dependent Care Credit
One of the biggest challenges parents face when it comes to providing adequate childcare is the cost of it. The child and dependent care credit can help families with this issue. In 2021, the credit was improved to help families affected by the pandemic. Before the new legislation, parents could claim up to 35% of the cost of childcare expenses for up to $3,000 for a child under 13 and up to $6,000 for two or more children. After that, the percentage decreased as the income grew. The maximum credit that parents can claim for childcare expenses increased from 35% to 50% in 2021. It can also be used for multiple children under 13 and up to $8,000 for one child. The phase-out period for the credit doesn't start until the income reaches $125,000. The child and dependent care credit can also help pay for the expenses of caring for other family members. For instance, if a parent is living with an adult child, the credit can be claimed for the expenses related to their care.
Retirement Savings Contributions Credit
You may be able to take a tax credit for contributions made to a retirement savings account or an Achieving a Better Life Experience (ABLE) account. These accounts are commonly referred to as "individual retirement accounts." Depending on your contributions and adjusted gross income, you can get within 10% to 50% saver's credit.
Social Security Taxes
Unfortunately, this doesn't work for employees because they can't deduct the 7.65% of pay that's put into Social Security and Medicare.However, if you're self-employed, you can still deduct the portion of your income that you pay due to the total 15.3% tax rate. This allows you to reduce the amount of money you spend on taxes.
American opportunity tax credit
The first $2,000 you spend on education expenses, including tuition, books, equipment, and school fees, plus 25% of the next $2,000 for a total of $2,500, is eligible for this credit. However, this doesn't include living expenses or transportation.
Lifetime learning credit
The lifetime learning credit allows you to claim up to 20% of the first $10,000 you spend on education expenses, such as tuition and fees. Although the credit doesn't cover transportation or living expenses, it can cover supplies and books for coursework.
Medical expenses deduction
Unreimbursed medical expenses that exceed 7.5% of your adjusted gross income can be claimed as a qualified expenses deduction.
Mortgage interest deduction
The mortgage interest deduction is a way to make homeownership more affordable. It can reduce the amount of income qualifying homeowners pay in taxes by the amount of mortgage interest they pay.
Home office deduction
The IRS can let you write off certain expenses if you use a portion of your home for business-related activities. These include real estate taxes, repairs, and utilities.
Educator expenses deduction
School teachers or other eligible educators can deduct up to $250 spent on classroom supplies.
Residential energy credit
The IRS allows individuals to deduct up to 26% of the cost of installing solar energy systems. It includes the costs of water heaters and solar panels. As you can see, there are many opportunities to reduce what you pay on tax. To reduce your tax bill, you need to find out and claim all the credits and deductions available to reduce your tax bill.
Don’t leave money on the table, and you will be surprised to see how much money you can save.
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