Welcome to the fifth part of Money Under 30’s “Stress-Free Tax Filing Guide”. Today, we’re going to take a closer look at our available deductions.
- Tax Documents Checklist: A Guide to Getting Started
- Choosing the best way to file a declaration
- Tax Software: When to Use and How to Choose
- Tax tables (details, capital gains, business income, etc.)
- Don’t Miss… Loan and Deductible Checklist
- Exceptions (Audit Prevention, Renewals, Payment Plans and Settlement Payments)
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Everyone wants tax breaks… or something. When it comes to taxes, these credits, adjustments, and deductions are your go-to. They will lower your profits by reducing the amount you owe or by increasing your tax refund.
Therefore, it is important to have an idea of what tax credits are available and which ones you may qualify for. This is one of the main drawbacks of even the best tax filing software – they don’t know every detail of your financial life. They may give you a list of sections to navigate, but you need to know where to look to get the breaks you are entitled to and deserve. To help you familiarize yourself with these tax incentives, we’ll look at the most common ones below.
Before we begin, pay attention to this simple rule that many people don’t understand: all tax credits are not the same. Tax credits, deductions and adjustments are not the same thing! These are three completely different things that affect your tax return in different ways. However, here is a list of tax credits that may make the most difference to your return:
SETTINGS
The adjustments are in the second section of Form 1040. These adjustments will be deducted from your total income to get your adjusted gross income (AGI).
Student loan interest. Cursing your seemingly endless student loan payments? It’s good that there is a tax adjustment for this expense. You will receive a Form 1098-E in the mail showing the amount of interest you paid and you must include it on your return. You do not qualify for this adjustment if you are married and are applying separately, or if you may be claiming as another person’s dependent. Your AGI must be below $75,000 if you are single and $150,000 if you are married and applying jointly. The maximum deduction you can receive is $2,500. For more information, visit the IRS website.
Self-employment adjustments. Freelancers rejoice in self-employment adjustments! Every freelancer or self-employed person who pays tax through the SE Schedule will be able to deduct half of the self-employment tax amount as an adjustment – no questions asked.
Training and fees. If you attended a post-secondary institution during the year, you may be eligible for a tuition and fee adjustment of up to $4,000. You can get more information about this here.
Relocation expenses. If you got a new job (or your first job) this year and had to move more than 50 miles because of your new job, you can claim relocation expenses upon your return. Typically, these costs include transportation, hotels and lodging, parking, and tolls.
Jury duty. You were called to serve on a jury this year, but you had to hand over your salary to your employer? Generally, if your employer pays you for your jury days, they will require you to hand over your jury pay. But the IRS requires you to include this income in your taxes. Fear not, however, you can include the amount you earned in your total adjustments on line 36 of Form 1040. Simply attach documentation to your return and check “Jury Payment” next to line 36.
DEDUCTIONS
The deductions are just the itemized deductions that we discussed last week. You can only claim deductions if you have listed the deductions (instead of the standard deductions) and completed Appendix A. Deductions include important things such as mortgage interest, property/state/local taxes, and charitable deductions, but they are also include these unclear other deductions. , which are explained in more detail below.
mortgage interest. These costs alone usually divert the taxpayer from choosing the standard deductible item. Make sure you include your Form 1098—a form that shows the amount of mortgage interest you paid—with your return.
Taxes on personal property. Do you own a home and live in a high-tax county? You can finally take advantage of your tax return by deducting the total amount you paid in property tax for the year. It also includes any other property taxes you have paid, such as cars or boats.
State income tax vs. sales tax. When you remit, you can choose to deduct state income tax or sales tax. How do you decide? The general rule is that if you live in a state where there is no state income tax (or if you believe you have paid more sales tax than state income tax), you may deduct state sales tax instead. Don’t worry – you don’t need to keep all the receipts you receive throughout the year; The IRS has a calculator on its website to help you determine how much sales tax you can deduct.
Miscellaneous fees. As I explained last week, there are a number of minor expenses called Miscellaneous Deductions that you can claim as itemized deductions. The catch is that you can only deduct more than 2% of your AGI. If your AGI is $50,000, you can only deduct expenses after the first $1,000 (50,000 x 0.02 = 1,000). The list of various deductions is quite long, but below are the main ones that are most likely to push you to the threshold:
- Tax preparation fees
- Job Search Costs
- Union dues
- Unreimbursed business expenses
- A uniform
- Courses / training to improve current professional skills
LOANS
Credits may be the most beneficial tax credit, but they are also the hardest to get. The credits are literally deducted directly from the total amount of tax you owe. This is different from adjustments and deductions, which are deducted from your income and not from the actual tax you owe. Remember how awesome payday credit was in 2010? This was because it is a tax credit and directly lowered your tax bill.
Childcare loan. When people refer to newborns as a new tax deduction or credit, they are not kidding. Children can definitely reduce your tax bill. To qualify for a Care Credit, the caregiver must be your qualified dependent and the care must be provided in a way that allows you or your spouse to work. If you are a housewife who needs extra help, unfortunately you will not qualify for this loan. If you are married and apply separately, you will not qualify for the loan. Finally, you are only allowed to claim up to 35% of the expenses you incurred.
Child tax deduction. Depending on certain factors, you may receive up to $1,000 per child from your tax bill. First, the child must be your dependent, under the age of 17, have lived with you for more than six months, provide more than half of your support, and must be a US citizen. This credit is capped based on your AGI, starting at $110,000 for married taxpayers and $75,000 for all other taxpayers.
Loans for education. There are two educational loans and they are:
- American Credit Opportunity. This loan was created under the American Recovery and Reinvestment Act (ARRA) of 2009 and has been extended through 2017. The American Opportunity Loan has significantly changed the already existing Loan of Hope. This loan is available for up to $2,500 for expenses paid during the first four years of college. The newly modified version of the loan is popular because the income caps are higher, from $160,000 for married taxpayers to $80,000 for single taxpayers.
- Lifelong learning loan. This loan is great because it helps taxpayers who are lifelong learners. There is no limit to the number of years you can qualify for this loan, and you can qualify up to $2,000 as eligible expenses (tuition, fees, books, supplies). You cannot qualify for the American Opportunity Credit and the Lifetime Learning Credit at the same time—you must choose one or the other. This loan has more income restrictions than the American Opportunity Credit. You can get more information here.
Have questions about this list of tax credits? Let me know!
Further down in the Stress-Free Tax Filing Guide: Exceptions: Audits, Renewals, Payment Plans, and Estimated Payments.
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