April 15 – tax day, a day many Americans dread. When it comes to tax time, people are using the previous year’s income to look for any possible deductions and tax credits. A tax deduction can be defined as a reduction of income that can be taxed, and is usually a result of expenses, mainly those needed to provide additional income. Tax deductions help reduce taxable income, while tax credits help reduce tax. According to irs.gov, there are two types of tax credits: nonrefundable and refundable. A nonrefundable tax credit means you can only get a refund up to the amount of taxes you owe. A refundable tax credit is when you get a refund, even if it is more than the amount you owe.
Examples of deductions are student loan interest (up to $2,500), mortgage interest, and real estate taxes. Tax credit opportunities are costs of child care, retirement contributions to 401(k), qualified education costs, and individual retirement accounts. However, there are many more ways to save on your taxes.
- Check to see if you qualify for an earned income tax credit – This credit applies to low and moderate income taxpayers, and credits can be as high as $6,000. If you earn under $50,000 per year, it might be worth your time to look into this possibility.
- Record your medical expenses – Certain health-related expenses, such as acupuncture and supplies are deductible, but make sure to keep all your receipts.
- Become energy efficient – Making your home more energy efficient has many benefits, including various tax credits. Installing insulation, new windows, heating and cooling systems, and using alternative energy sources could help you get a break.
- Costs of raising a family – For parents, child care costs, the child tax credit, and counting dependents in your household are potential advantages for a tax break. Also, if divorced, alimony payments are tax deductible.
- Use your mortgage – In the long run, a homeowner may benefit by keeping her mortgage for a longer period, because the payments are deductible. However, keep in mind the amount of the tax benefit compared to the payment’s interest. This tip can be beneficial depending on when you are planning on paying off your mortgage.
- Save for college – If you have children heading to college, start a 529 college savings account for them. The purpose of this account is for the money saved to go towards tuition, and parents don’t have to pay taxes on the earnings.
- Plan for retirement – Put more money into your retirement account each month and lower your taxes. By adding money to your 401(k) or IRAs, you are eligible for tax deductions. The money that you contribute to a traditional IRA is a pre-tax contribution that lowers your taxable income, meaning you’ll owe less in income taxes.
- Donate to charities – Besides writing a check, donate toys, clothes, and other household items to write off on your taxes. Other opportunities include the cost of travel for attending volunteer-related events or buying and donating an item to a charity for use. Unfortunately, your time spent volunteering isn’t a tax deduction.
- Save your receipts – Besides saving receipts for charitable donations, keep them for any purchases that are work-related or taxes paid to state and local governments, or for job hunting. Most of the time you can get a deduction for fees and travel spent from going from interview to interview. If you run your own home-based business, figure out what portion of your home is devoted to the company. It might be an office or table in your kitchen. By figuring out the portion, you can determine how much of your expenses, such as utilities, or mortgage, are related to your business.
Every year when tax season rolls around, many people are scrambling to find ways to reduce their taxes. Use these tips for tax deductions and tax credits. At the end of the season, you just might have more money in your pocket than you thought.