Several deductions and credits can help reduce how much you owe or even give you back the money when you file your taxes. To keep things simple, we’ll define “deductions” as any item that reduces how much tax you’re required to pay.
Student loan interest deduction
If you paid interest on your student loans, you might deduct up to $2,500 from your taxable income.
American Opportunity Tax Credit
If you withdrew from school, you’re eligible for the money back. You can get up to $2,500 if your education was interrupted due to a felony charge; however, this does not include living costs or transportation expenses.
Lifetime Learning Credit
You can deduct 20% of the first $10,000 you spent on education and fees for a maximum of $2,000. The Lifetime Learning Credit is like the American Opportunity Tax Credit in that it does not include living expenses or transportation as qualifying costs. You can claim course materials or supplies if necessary.
Child and dependent care tax credit
It’s generally 35% of $3,000 or less in daycare and similar expenses for a kid under the age of 13, a spouse or parent unable to look after themselves, or another dependent so you may work — and up to $6,000 in charges for two or more dependents. The standard deduction for one or two children is $8,000 in 2021; the maximum amount rises to $16,000 for three or more children.
Child tax credit
The Tax Cuts and Jobs Act of 2017 decreased the non-child dependent exemption to $2,500 beginning in 2020. By 2021, this could save you up to $3,600 per child.
This line item covers up to $14,300 in adoption expenses per kid for the 2020 tax year. It’s $14,440 in 2021.
Earned Income Tax Credit
In 2020, a dependent credit can save you up to $6,660 for each kid under 17. For 2021, the earned income credit ranges from $543 to $6,728. It’s possible that if your AGI is less than approximately $57,000, this benefit might help you substantially reduce your taxes.
Charitable donations deduction
If you itemize your deductions, you might be able to subtract the value of your charity contributions, whether they’re in cash or property, such as clothing or a vehicle, from your taxable income. For the 2020 tax year, you may be able to deduct $300 on your tax return without having to itemize.
Medical expenses deduction
You may generally deduct qualified, unrefunded medical expenses that exceed 7.5% of your Adjusted Gross Income for the tax year.
Deduction for state and local taxes
The cost of your primary residence and the property taxes you paid for it may be deducted up to $10,000 ($5,000 if married filing separately), including any state and local income taxes or sales taxes.
Mortgage interest deduction
The mortgage interest tax break is presented to make house purchases more affordable. It lowers the federal income tax qualifying homeowners pays by reducing their taxable income through their mortgage interest.
Gambling loss deduction
Gambling losses and costs are only deductible to the extent of gambling winnings. According to IRS rules, spending $100 on lottery tickets isn’t deductible unless you win at least $100, and you can’t deduct more than the amount you win.
IRA contributions deduction
You can deduct contributions to a traditional IRA if you qualify, though the amount you may deduct is determined by your employer’s retirement plan and how much money you make.
401(k) contributions deduction
The IRS doesn’t tax money you divert from your regular paychecks into a 401(k). In 2021, you may contribute up to $19,500 each year to such a plan. If you’re 50 or older, you can put away as much as $26,000. In 2022, the yearly contribution limit rises to $20,500 (for those aged 50 or older, it rises to $27,000). Employers frequently administer these retirement accounts, although self-employed individuals may establish their own 401(k)s.
This is a limited deduction of 10% to 50% of up to $2,000 in contributions to an IRA, 401(k), 403(b), or other retirement plans (401(h)(2) and below) ($4,000 if married filing separately). This percentage varies depending on your filing status and income.
Health Savings Account contributions deduction
HSAs allow you to make tax-deductible contributions and receive tax-free withdrawals, as long as you use them for qualified medical expenses. You can contribute up to $3,550 in 2020 if you have self-only high-deductible health coverage.
If you have family coverage through a high-deductible plan, you may contribute up to $7,100 in 2020. For 2021, the individual contribution limit is $3,600, while the family contribution limit is $7,200. You can put an extra $1,000 into your HSA if you’re 55 or older.
Self-employment expenses deduction
Several tax expenditures are available to freelancers, contractors, and other self-employed people.
Home office deduction
The IRS permits you to deduct related costs if you only use part of your property for business-related activity and your primary home. You may also take a depreciation deduction on the value of this area.
Educator expenses deduction
If you’re a school teacher or other eligible educator, you may claim $250 in expenses on educational supplies.
Residential energy credit
This one may save you up to 26% of the cost of installing solar energy systems, which includes solar water heaters and solar panels.
There are many tax deductions and credits available to taxpayers. Some of the more common ones include the mortgage interest deduction, the state and local taxes deduction, and the IRA contribution deduction. There are also a variety of other deductions and credits that may be available depending on your specific situation.
Be sure to consult with a tax professional like The Oasis Firm to learn about all of the deductions and credits you may be eligible for.