Tips for Getting a Higher Return on Your Tax Deductions
by James Smith
15 Tips for Getting a Higher Return on Your Tax Deductions
Tax season is quickly approaching. If you dread the stress of crunching numbers and decoding financial jargon, you aren’t alone. However, when done right, filing your taxes is an opportunity to capitalize on deductible expenses in order to get the highest return possible, and who doesn’t love getting a little extra cash?
Whether you’re a college student, new to the workforce, or a recent homebuyer, there are many common expenses that you should be writing off, but probably aren’t. Check out the list below for ways to get the biggest bang for your buck on your tax returns this year.
Tax Credit vs. Tax Deductions
First, let’s clarify a bit of confusing terminology. There are two ways to save money on your taxes – credits and deductions.
Tax credits provide a dollar-for-dollar reduction of your income tax liability. In other words, they directly reduce the amount of tax you owe. There are refundable and nonrefundable tax credits. Refundable tax credits can result in a refund check if the tax credit is greater than your tax liability. Nonrefundable tax credits limit the value of your credit based on the amount of tax you owe. This means that if your credit exceeds your tax liability, you will not receive a refund of the excess amount.
Tax deductions reduce your taxable income according to the percentage of your marginal tax bracket. There are also two kinds of tax deductions: itemized and standard. The standard deduction is a fixed dollar amount that reduces your taxable income. The standard rate varies based on your filing status. If you are eligible, you may choose to itemize your tax deductions if the sum of your itemized deductions is greater than the value of your standard deduction. Itemizing your deductions requires you to list out specific deductible expenses, which can be a bit of a hassle, but could have a nice payoff.
Phew! Okay, let’s get into the good stuff.
Tax Deductions and Credits for Students
1. Student Loan Interest
About 44 million Americans are currently in the process of repaying student debt, racking up a total of approximately $1.3 trillion nationwide. The silver lining is that interest on student loans is tax deductible, which means that you get a refund for a percentage of the interest that you pay each year. If your parents are helping you repay your student loans, don’t worry. Any child who is not claimed as a dependent can qualify to deduct up to $2,500 of student loan interest paid by their parents. Thanks, Mom and Dad!
2. American Opportunity Credit
The American Opportunity Credit is a much needed financial break for eligible college students in the first four years of their degree. Eligible college students can receive up to $2,500 in credit per year, according to the IRS. If this credit covers the entire amount of tax that you owe, you can receive a refund check for up to forty percent, or up to $1,000 or 40% of your remaining remaining credit.
3. Lifetime Learning Credit
The lifetime learning credit offers non-traditional students up to $2,000 in tax credit for all years of post-secondary education and any additional courses to acquire or improve job skills. If you are taking courses at your local community college, working toward a certification to boost your performance at work, or planning to attend a conference to round out your skillset, the lifetime learning credit can help to reimburse you for those expenses.
Tax Deductions and Credits for Employees
4. Moving Expenses
If you have to relocate for your job, you can write off your moving expenses as a tax deduction. To qualify, your new workplace must be at least 50 miles farther from your old home than your previous workplace. Eligible expenses include transportation, storage, and travel expenses.
5. Job Search
If you were laid off or are searching for a job you may be eligible to write off your job hunt expenses on your tax return. Job hunt expenses can include transportation, lodging, employment agency fees, and costs for any printed materials like business cards and your resume.
6. Child Care for Work
If your child care is not covered by a reimbursement account from your employer, you may be eligible for a tax credit for up to 35 percent of qualified expenses. This can cover up to $3,000 for one child or $6,000 for two children. Eligible child care providers include daycare, babysitters, or summer camps for children up to thirteen years of age.
7. Juror Compensation Paid to Employer
Many employers provide paid time off for jury duty days, with the stipulation that you must turn over your jury duty pay to your employer. The IRS demands that you report any income earned on jury duty, but you can write off the amount paid to your employer as a deduction.
8. Union Dues
If you are part of a union, you can write off your dues and initiation fees as a tax deduction, because union dues are considered an unreimbursed employee expense.
Tax Deductions for Homeowners
9. Refinancing Your House
If you refinanced your home this year, the IRS requires that you deduct the points on the new loan over the life of that loan. For example, if you have a 30-year mortgage, you can deduct 1/30th of the points per year. Although it’s not much, over the years it adds up. When every little bit counts, it is definitely worth including in your tax deductions.
10. Energy-Saving Home Improvements
This year is the final year to take advantage of tax credits for energy-efficient home improvements. If you installed energy-saving equipment or materials in your home in 2016, including insulation, fuel cells, geothermal heat pumps, solar water heat, or residential wind turbines, you may be eligible to claim up to $500 worth of expenses in tax credit for 2017.Personal Tax Deductions
Personal Tax Deductions
11. Vehicle Expenses
When deducting vehicle expenses related to business, you must choose between deducting the standard mileage rate or the actual vehicle expenses. For 2016, the standard mileage rate is 54 cents per mile. Other vehicle expenses include depreciation, licensing, gas and oil, tolls, lease payment, insurance, repairs, and parking fees.
12. Uninsured losses
Casualty and theft losses relating to your home, household items, and vehicles may be deducted from your federal income tax return. Natural disasters that occur in an area declared by the president as eligible are also qualified tax deductions.
13. Charity Expenses and Gifts
Most people know that you can write off charitable donations. However, you can also deduct any out-of-pocket expenses that benefited a charity, such as gifts, prepared meals, supplies, and babysitter fees while volunteering.
14. State Sales Tax
If you itemize your deductions, you can choose to claim either state and local income tax or state and local sales taxes. Most people pay more in income tax. However, depending on your state’s sales tax rate, it may benefit you to claim your sales tax instead.
15. Tax Preparation Fees
If you hire an accountant or use an online service to prepare your taxes, you may be eligible to deduct that expense. The cost of your tax preparation must equal more than 2% of your annual gross income in order to qualify.
I hope these tips help you get the biggest bang on your tax returns this year. For more helpful money-saving tips, visit our blog.
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