Most people feel that filing tax returns is not only cumbersome but a huge stress point. The stress mounts as you realize that you missed mentioning tax deductions.
When you claim tax deductions, it either pares your tax liability or increases the tax refund amount.
About Tax Deduction
Tax deduction is a facility provided to a taxpayer. It is a fixed amount that the IRS permits you to deduct from your adjusted gross income (AGI).
It reduces your taxable income and the amount of tax you pay.
About Tax Credit
Tax credit is an incentive. It lowers the dollar-for-dollar amount that a taxpayer pays to the government.
If your tax bill is $1000 and the tax credit is $1000, your tax payment is nil. If the tax credit is higher than the tax bill, you get a refund.
However, most credits are non-refundable. A tax credit can lower your taxes to a greater extent than a tax deduction because the latter is a deduction from the taxable income and, not from taxes.
Claiming Tax Deductions
You can claim two types of tax deductions. You can choose either a standard deduction or itemized deduction, but cannot claim both.
- The Standard Deduction– This is a flat dollar deduction, which is deducted from your AGI while filing tax returns without any questions asked to claim it.
- Itemizing Deductions– This allows you to reduce your taxable income by itemizing tax deductions from hundreds of tax deductions you are qualified to claim. The more such deductions you qualify for, the lower is your tax liability.
Here are some of the most significant tax deductions in 2019.
1. Health Insurance Premiums
Medical expenses are unpredictable and can make your budget go haywire. IRS provides some relief here in some cases.
When deductible medical expenses exceed 10% of AGI, you can claim it as an itemized deduction in 2019. For the earlier two tax years – 2017 and 2018 – it was lower at 7.5% of the AGI.
There is a helpful caveat. You can claim 100% of the premium paid, if you are self-employed and pay your health insurance. The entire premium amount is deductible from your AGI and not as an itemized deduction.
2. Sales Taxes
Here is a big money saver for you. You can opt to deduct state income taxes or sales taxes from the federal income tax payment.
It works best if you live in a state with no income tax, or if your sales tax deduction is more than the state income tax deduction.
The sales tax break is beneficial, especially when you make a high-value purchase like a car.
You need to itemize it to obtain this deduction, instead of choosing the standard deduction.
You can use Turbo Tax software to decide which type of deduction benefits you the most. Should you go for standard deduction or Itemized deduction taking into consideration your entries?
If you choose itemized deduction, then you need to consider which works to your advantage –state income tax or sales tax.
3. Tax savings for teachers
You rarely find a teacher who does not spend on some of the other classroom items needed for teaching.
IRS seems to have taken note of this kind act and permits a deduction of up to $ 250 for classroom materials for qualified K-12teachers. You can claim this deduction from your income and enjoy this benefit even without itemizing.
4. Paying Babysitters as a Deduction
According to the federal tax court ruling, it is okay if you want to list the payment made to babysitters as a charitable contribution to the total tax returns.
But look at the conditions to claim such a deduction. While the babysitter watches the kid for a payment, you must be volunteering with no pay for a recognized charity.
You are required to document the date, time, and name of the charitable organization you were doing voluntary work for.
Tax experts recommend caution when you claim this deduction as it is a gray area.
5. Charitable Gifts
Most taxpayers know about the tax-deductibility of charitable donations, but forget to pick them up while filing returns.
Even out-of-pocket expenses for charity work qualify for a deduction.
For example, when you make brownies for a fundraiser, keep the store receipts for ingredients, and claim a deduction.
Always itemize the costs, because it is useful in case of an audit.
6. Unusual Business Expenses
You can claim this deduction from your business income if it is advantageous for your business.
For example, a bodybuilder may receive approval to deduct the money spent on body oil used in a competition.
Similarly, a junkyard owner can try deducting expenses on cat food they used to attract stray cats to their property and keep rats away.
7. Lifetime Learning
The college students can use many tax deductions under the tax code, and such tax breaks are also available for those who have already graduated.
Lifetime Learning Credit provides an annual sum of up to $2,000. This is deductible from the first $10000 spent on post-high- school education, to enhance educational qualifications.
Age is no bar. However, it gets phased out at higher income levels.
8. Self-employed Social Security
Can it be a disadvantage to be self-employed? You fork out 15.3 percent of income towards Medicare taxes and social security.
Generally, both an employer and employee share it. The saving grace is the deduction of 7.65 percent employee contribution from your income taxes.
9. Looking For Work
Being unemployed is a trying period. If you had been seeking a job in the same field for tax years before 2018, you could itemize the deductions.
These include the money spent on the mileage you put into your vehicle, driving for interviews, or even for printing resumes.
You can deduct any qualifying expenses that exceed the threshold of 2 percent of your AIG.
Starting in 2018, you cannot deduct these expenses from the federal tax. However, in states such as California, this deduction is still available in 2019. Some of the above deductions are riddled with ifs and buts.
However, you can deal with them smoothly when you use good tax preparation software or look for professional help. They will efficiently calculate your tax liability in line with the updated tax code and its effect on your net income.