Get Know Your Tax Deductions And Credits For Maximum Return
No one likes paying taxes, but there’s no getting away from them. However, if you know what tax deductions and credits are available, you can maximize your returns and save some cash.
But where do you start? Many people need to realize the deductions and credits they are eligible for, so in this article, we’re going to break it down and make it easy for you to understand, so you can get the biggest bang for your buck.
What Are Tax Deductions and Credits?
Tax deductions and tax credits can be powerful tools to help reduce your overall tax burden. This is because tax deductions reduce the amount of your taxable income, which in turn reduces the amount of taxes owed.
A tax credit directly lowers the amount of taxes you owe, providing a dollar-for-dollar reduction of your tax liability. For example, if you owe $250 in taxes and are eligible for a $1,000 credit, you would receive a check for the difference.
It is important to understand how each works and which deductions or credits you may be eligible for in order to take advantage of them.
When it comes to tax time, there are a variety of credits and deductions that may be available to you. Here is a quick overview of some possible credits and deductions:
Child tax credit:
When it comes to the 2022 tax year, parents could receive up to $2,000 for each of their children. Out of this $2,000, $1,500 of the credit may be refundable. This means that even if their income is too low for them to owe any taxes, they could still receive the $1,500 refundable amount.
Child and Dependent Care Credit:
For those responsible for a spouse, parent, or child under the age of 13, or another dependant who cannot take care of themselves, the Child Care Expense Deduction is intended to help with the cost of daycare and related expenses while you are working. Under this provision, you may deduct up to 35% of the total expenses for the care of one child or two or more children; the maximum amount you can deduct is $3,000 per child or $6,000 for two or more children.
It’s important to note that this deduction is only available to taxpayers who provide care for a dependent while away from home, such as when they are at work. Therefore, the deduction cannot be claimed for care provided while the taxpayer is at home. Additionally, expenses such as medical and educational costs cannot be included in this deduction.
Lifetime learning credit:
The Lifelong Learning Credit is a great way to save money on educational expenses – up to $2,000 in deductions can be made for qualified tuition and fees.
However, it does not cover living expenses or transportation costs like the American Opportunity Tax Credit does, so be sure to keep that in mind when considering what kind of educational credits to apply for.
Books or other supplies required for the coursework may be claimed, so make sure you also keep track of those expenses. With the Lifelong Learning Credit, you can save thousands on your taxes each year.
American opportunity tax credit:
The American Opportunity Tax Credit (AOTC) is a great way to reduce higher education costs. It enables taxpayers to deduct up to $2,500 of the cost of tuition, books, fees, and other related expenses when filing their taxes.
The AOTC is available for four years of postsecondary education. To qualify, you must enroll in at least a half-time program and complete four years of postsecondary education.
Student loan interest deduction:
Next up is the student loan interest deduction. If you have taken out student loans to further your education and paid interest on those loans, you can benefit from the student loan interest deduction. This deduction allows you to deduct up to $2,500 from your annual taxable income.
Charitable donations deduction:
If you itemize your deductions on your taxes, you could be eligible to reduce your taxable income by the amount of any charitable contributions. This includes cash donations and in-kind items like clothing, furniture, or a car.
Keep records of all your charitable contributions, as you’ll need to provide detailed documentation for any deductions you take. Additionally, the IRS limits charitable contributions deduction to a maximum of 60% of your adjusted gross income.
Medical expenses deduction:
Medical expenses are often an overlooked deduction that can save significant amounts of money for taxpayers. For those with eligible, unreimbursed medical costs during the tax year, these expenses can be deducted from their taxes if they exceed 7.5% of their adjusted gross income for that tax year.
The tax benefit of an adoption credit can be a great help for those looking to adopt, as it provides up to $14,890 for 2022 for each child adopted. Adoption expenses covered by the tax credit can include costs related to home study fees, court, and legal fees, attorney fees, travel expenses, and other adoption-related costs.
Gambling loss deduction:
When it comes to claiming deductions for gambling losses and expenses, only the amount of winnings from gaming activities is eligible for deduction. As a result, you cannot deduct any amounts spent on lottery tickets or other gambling expenses unless your winnings are equal to or greater than what was spent. It is important to note that you cannot deduct more in losses than what was won, even if the amount of losses incurred exceeds what was won.
IRA contributions deduction:
Contributing to a traditional IRA may be a smart move when it comes to financial planning and retirement savings, as the amount of money you can save by deducting contributions can be substantial. But, how much you can deduct is not always clear.
The amount of your contribution that you can deduct is mainly dependent on your income and whether you or your spouse have access to a workplace retirement plan.
401(k) contributions deduction:
Contributing to a 401(k) retirement plan can be beneficial for many reasons. Not only will your contributions grow tax-deferred, but you can also deduct up to $20,500 ($27,000 if you’re 50 or older) from your annual taxable income.
The saver’s credit is a good option for those looking to save for retirement, as it provides an incentive to do so by allowing taxpayers to receive a credit of up to 50% of the amount they contribute to their retirement accounts.
This credit ranges from 10% to 50% of donations made to an IRA, 401(k), 403(b), or specific other retirement plans worth up to $2,000 ($4,000 if filing jointly). Depending on your filing status and income, the percentage will vary, so it’s important to do your research before claiming this credit.
Health savings account contributions deduction:
For those with high-deductible health plans, contributing to a Health Savings Account (HSA) can be extremely beneficial. HSA contributions are tax-deductible, and the withdrawals are tax-free if they’re used for eligible medical costs.
This includes both cash contributions and rollover amounts, up to the contribution limits of $3,650 for individual coverage (or $7,300 if you have a family coverage plan) for the 2022 tax year. Additionally, there’s an additional catch-up contribution of $1,000 allowed if you’re 55 or older. Be sure to check with a
Self-employment expenses deduction:
The self-employment tax deduction can be a great way for freelancers, contractors, and other independent workers to reduce their taxes. This is because self-employed individuals are able to deduct their business expenses from their income on top of the standard deductions.
Home office deduction:
Suppose you use a portion of your home for business-related activities. In that case, the IRS allows you to deduct connected rent, utilities, real estate taxes, repairs, maintenance, and other associated costs if you utilize the space often and exclusively for business-related activity.
These expenses can add up to a sizable deduction, making it an attractive option for independent workers who use part of their home as a workspace.
Residential energy credit:
The residential energy credit may provide some welcome relief for those looking to make their homes more energy-efficient. This tax credit allows taxpayers to receive a credit for up to 30% of their costs spent on qualified energy-efficient improvements, such as solar water heaters and solar panels.
Electric vehicle tax credit:
The electric vehicle tax credit may be a great incentive for those looking to purchase an electric vehicle. For the tax year 2022, this nonrefundable tax credit’s eligibility ranges from $2,500 to $7500 and is based on the vehicle’s weight, the producer, and whether or not you are the car’s owner. The credit is significantly increased for the tax year 2023 (taxes submitted in 2024) and now covers secondhand vehicles as well.
Educator expenses deduction:
For teachers and other qualified educators, the educator expenses deduction allows you to write off up to $300 of classroom supplies from your taxable income. So if you’re a teacher who spent money on items like books, pencils, and other supplies for your students in the 2022 tax year, be sure to take advantage of this deduction.
Mortgage interest deduction:
The mortgage interest deduction is a great way to reduce the federal income tax eligible homeowners must pay. This deduction allows homeowners to deduct the amount of mortgage interest from their taxable income, thus lowering the amount of tax they owe.
Be sure to read up on the requirements for this deduction before filing to make sure you qualify.
Deduction for state and local taxes:
For those who itemize their deductions, the deduction for state and local taxes (SALT) is an excellent way to lower your tax bill. This deduction allows taxpayers to deduct up to $10,000 ($5,000 if you’re married and filing separately) from their taxable income for a combination of property taxes and either state and local income taxes or sales taxes.