Three words: annual tax returns. Just the thought of it sends most people into a frenzy. For most, there isn’t anything enjoyable about the tax filing process. If you find yourself owing money to the IRS, then your filing experience just got worse, while receiving a refund just made your experience better. One way to ensure you have the best outcome when filing your taxes is to understand tax deductions. Deductions are here to work in your favor! It is important to do your research and take advantage of this benefit.
Tax Deduction Vs. Tax Credit
Although tax deductions and tax credits are two different benefits when filing your taxes, both are incredibly helpful. It is crucial to understand the difference and how each applies to you. If you are unfamiliar with all of the tax deductions and credits that apply to your situation, reach out to your local accountant as they can assist. Because you must file both state and federal tax returns, get familiar with your specific state guidelines. For those residents completing an Arizona State tax return, you can refer to the Arizona Department of Revenue website.
A tax credit is essentially money directly subtracted from the amount you owe the IRS.
- For example if you owe the IRS $1,000 but have a tax credit of $200, then the latter would be directly withdrawn from the $1,000 leaving you to owe $800.
A tax deduction lowers your total taxable income. Tax deductions are based off of the tax bracket you fall in.
- For example if you are in the 12% tax bracket and you have a $1,000 deduction, then you would ultimately save $120 and so on.
- For information on tax bracket specifics, you can visit the IRS website or contact your accountant.
Claiming Tax Deductions
Standard Deductions: A standard deduction is a blanket amount available to all taxpayers. Depending on your filing status will depend on the deduction amount you receive. Example filing statuses and amounts include:
- Single: $12,550
- Married, Filling Jointly: $25,100
- Married, Filling Separately: $12,550
- Head of Household: $18,800
Because the standard deduction is available for everyone, that means, people filing, for example, as “single” would all receive the same deduction amount and so on down the list of filing statuses.
Itemized Deductions: Itemizing your deductions is only beneficial if you have a higher itemized deduction amount than the standard deduction provides. Most people will benefit from the standard deduction more, however, these are some of the possible deductions you can apply to your itemized list:
- Interest on Home Equity Loans or Mortgages-As a benefit of owning a home and to ease some of the financial burden, this deduction has been created. This can be applied for loans up to $750,000. Keep your annual mortgage statements and tax documents from your mortgage holder as this has all of the necessary information to deduct the interest.
- Charitable Donations-If you made monetary or physical donations to qualifying charities, then you can deduct this from your taxable income. It is crucial to keep all documentation relating to your donations in the case of an audit. You must be able to provide proof of your donations. The IRS website or your accountant can provide you information regarding which donations qualify and up to how much can be deducted.
- Job or Professional Purchases-For those who are self-employed or considered freelance workers, many of the purchases for your business are out-of-pocket. By keeping proof of purchases, you can deduct eligible business expenses such as but not limited to gas mileage, office supplies and equipment, traveling fees such as airfare, hotel, and meals while away from home.
- Medical Expenses: You can itemize general medical expenses from doctor and dental visits, hospital stays, and surgery charges, to name a few. Medical expenses must not have been reimbursed to qualify and you must also maintain good financial records of the expenses. In order for the expense to also qualify, it must be more than 7.5% of your previous years’ income. For more specifics relating to this deduction, you can visit the IRS website.
- IRA, HSA, and 401K Contributions: When you contribute to an IRA, an HSA, or a 401k, these contributions are tax deductible. This will also benefit for you medical expenses and retirement financial planning in the long run. These contributions are pre-tax, meaning, the funds are contributed to the specified plan prior to your tax percentage being taken from your paycheck.
Most of these itemized deductions change year to year while others have stipulations attached to them. It is best to consult an accountant to ensure you are correctly applying and benefitting from these deductions. Because this is only a small portion of the possible deductions available to you, it is all the more reason to consult professional assistance.
When it comes to taxes, no one wants to pay more money than necessary, let alone receive less money back in a return than you are owed. Taxes are already stressful, don’t put the pressure of making these crucial decisions on your shoulders. An accountant can review your annual documentation and financial data to help you make the best choice for you and your wallet.