Imagine you work hard all year, only to find out that you owe a huge amount of taxes to the IRS. You feel frustrated and helpless, wondering how to pay your tax bill without going broke. You wish there were a way to reduce your taxes and keep more of your hard-earned money. Well, there is a way. It’s called tax deductions. Tax deductions are expenses you can subtract from your income before calculating your taxes. By claiming tax deductions, you can lower your taxable income and pay fewer taxes.
But here’s the catch: You may only know some of the tax deductions you are eligible for. Many people miss out on deductions that could save them hundreds or even thousands of dollars. That’s why we created this blog. In this blog, we will show you five tax deductions you may miss out on and how to claim them.
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Home Office Expenses
If you work from home, either as an employee or a self-employed person, you may be able to deduct some of the costs of maintaining your home office. These include:
- Rent or mortgage interest
- Repairs and maintenance
To qualify for this deduction, you must use a part of your home exclusively and regularly for business purposes. For example, you cannot claim a deduction for your living room if you also use it for watching TV or entertaining guests. It would help if you also clearly separated your personal and business areas.
The deduction amount depends on the method you choose to calculate it. You can either use the simplified method or the actual expense method.
The simplified method allows you to deduct $5 per square foot of your home office area, up to 300 square feet. This means you can claim up to $1,500 per year without having to keep track of your actual expenses.
The actual expense method requires you to keep records of all your home office expenses and allocate them based on the percentage of your home used for business. For example, if your home office occupies 10% of your home, you can deduct 10% of your rent or mortgage interest, utilities, insurance, etc.
You can choose the method that gives you the larger deduction, but you must use the same method for all future years unless circumstances change.
Medical expenses can be a significant burden for many people, especially if they have chronic conditions or face unexpected emergencies. Fortunately, the IRS allows you to deduct some of these expenses from your income if they exceed a certain threshold.
You can deduct your medical expenses exceeding 7.5% of your adjusted gross income (AGI). For example, if your AGI is $50,000 and your medical expenses are $10,000, you can deduct $6,250 ($10,000 – 7.5% x $50,000). To claim this deduction, you must itemize your deductions on Schedule A of Form 1040.
Medical expenses include payments for:
- Diagnosis, treatment, prevention, or cure of any physical or mental condition
- Prescription drugs and insulin
- Dental and vision care
- Medical equipment and supplies
- Long-term care services and insurance premiums
- Travel costs related to medical care
You can deduct medical expenses for yourself, your spouse, and your dependents. However, you cannot deduct expenses that are reimbursed by insurance or any other source.
Giving to charity is a noble act and a smart tax move. You can deduct the amount of money or property you donate to qualified charitable organizations from your income if you itemize your deductions.
To claim this deduction, you must have a written record of your donations, such as a receipt or a bank statement. You must also ensure that the organization you donate to is eligible for tax-exempt status. You can check the IRS website or consult tax professionals to verify this.
The deduction amount depends on the type and value of your donation. Generally speaking, you can deduct up to 60% of your AGI for cash donations and up to 30% of your AGI for non-cash donations. However, some exceptions and limitations apply depending on the nature and purpose of your donation.
For example, if you donate clothing or household items to a thrift store, you must ensure they are in good condition or better. Otherwise, you cannot claim a deduction for them. Also, if you receive any benefit in return for your donation, such as goods or services, you must reduce your donation’s value by the benefit’s value.
Student Loan Interest
If you have taken out a student loan to pay for your education or that of your spouse or dependents, you may be able to deduct some of the interest you pay from your income. This can help reduce your tax liability and make your loan repayment easier.
- To claim this deduction, you must meet the following requirements:
- You paid interest on a qualified student loan in the tax year
- You are legally obligated to pay the loan
- Your filing status is not married filing separately
- Your modified AGI is below a certain limit
- You or your spouse are not claimed as dependents on someone else’s return
The maximum amount of the deduction is $2,500 per year. However, the actual amount may be lower depending on your income level and filing status. You can use the IRS worksheet or online tools to calculate your deduction.
You do not need to itemize your deductions to claim this deduction. You can claim it as an adjustment to income on Schedule 1 of Form 1040.
Retirement Savings Contributions
Saving for retirement is one of the most important financial goals for anyone. Not only does it ensure your future security and comfort, but it also helps you save on taxes. The IRS offers several incentives for you to contribute to retirement savings plans, such as:
- Traditional IRA
- Roth IRA
- SIMPLE IRA
- SEP IRA
Depending on the type of plan you choose and your income level, you may be able to deduct some or all of your contributions from your income. This reduces your taxable income and your tax bill.
For example, if you contribute to a traditional IRA, you can deduct up to $6,000 per year ($7,000 if you are 50 or older) from your income as long as your modified AGI is below a specific limit. If you contribute to a 401(k) or similar plan, you can defer up to $19,500 per year ($26,000 if you are 50 or older) from your income.
However, if you contribute to a Roth IRA or a Roth 401(k), you cannot deduct your contributions from your income. Instead, you benefit from tax-free growth and withdrawals in retirement.
You can also claim a tax credit for your retirement savings contributions if you meet specific criteria. The credit is called the saver’s credit, and it can reduce your tax liability by up to 50% of your contributions, up to a maximum of $1,000 ($2,000 if married and filing jointly). The credit is available for low- and moderate-income taxpayers contributing to the above plans.
To claim the credit, you must file Form 8880 with your tax return and meet the following requirements:
- You are at least 18 years old
- You are not a full-time student
- You are not claimed as a dependent on someone else’s return
- Your adjusted gross income is below a certain limit
As you can see, there are many tax deductions that you may be missing out on. Taking advantage of these deductions can lower your taxable income and save money on taxes. However, you must also be careful to follow the rules and requirements for each deduction and keep proper records of your expenses and donations.
If you need help preparing your tax return or planning your tax strategy, contact Barron Income Tax. We are a professional and experienced tax service provider that can help you with all your tax needs. We can help you find and claim all the deductions that you are eligible for and maximize your tax savings.
Contact us today to schedule a free consultation and start your tax journey.