Filing an annual income tax report — a requirement for all U.S. citizens or permanent residents whose income exceeds certain thresholds — makes clear how much money we actually pay in taxes. Fortunately, the IRS offers a range of tax deductions and credits designed to cut down the amount of taxes you owe to the government.
What is a tax deduction?
Tax deductions are expenses that can lower your taxable income, or the amount of money you have to pay taxes on. When you subtract your qualifying deductions from your taxable income you’ll likely owe less — which is great news.
What is a tax credit?
A tax credit is often a dollar-for-dollar benefit that is subtracted from the amount of taxes you owe. There are three different types: nonrefundable, refundable and partially refundable, meaning that some tax credits are eligible for a payout — assuming you owe $0 in taxes — while some are not.
In general, the government gives deductions for expenses that invest in the health and wellness of yourself, your business, your family, the economy or the environment.
Here are a few common deductions that you might qualify for. Investigate, and they can help lower your final tax bill — or even get you some money back.
Homeowner deductions
Owning your own home may allow you to apply several deductions to your taxes.
*The mortgage interest deduction allows homeowners to subtract mortgage interest from your taxable income, subject to applicable limitations.
*If you have a home equity loan — or a second mortgage on your home — you can usually deduct the interest you’ve paid, as long as you’ve used the funds on home improvements.
*Property tax deduction allows homeowners to deduct certain state or federal taxes paid on your home or property. This can include primary or secondary homes, land, vehicles or boats.
*Mortgage insurance covers the lender if you can’t make your mortgage payments — and it’s often required for borrowers who put down less than 20 percent for a down payment. These insurance payments can sometimes be deducted from your taxes.
*The federal government rewards homeowners who make homes more energy-efficient. If you’ve made improvements to your home that cut down your energy bills — adding solar panels, for example — you may qualify for a credit that’s 30 percent of the eligible expenses.
Children and dependents
Kids are expensive — fortunately, there are several deductions that help ease the cost of children and dependents. (Note: a dependent is a qualifying child or relative other than the taxpayer or spouse who is claimed on tax forms as a dependent and relies on you for necessities like food, clothing and financial support.
*The Child Tax Credit grants a $2,000 tax credit for every qualifying child under 16 years old, subject to applicable limitations. (Though if you’re taking the credit as a tax refund rather than just lowering your amount owed, the maximum amount is $1,700.)
*Child and dependent care credit offers relief to qualifying families if they pay for child care while working or looking for work. You can write off up to $3,000 of expenses to receive $1,050 in tax credit (or $6,000 for $2,100 if you have two or more children).
*The Earned Income Tax Credit helps qualifying low-to-moderate income earners, whether they have a dependent or not. EITC taxpayers must have earned money throughout the year, but cannot have investment income more than $11,000. The amount of earned incomes varies based on dependents, so look into the EITC to see if you qualify.
Education
To help support citizens and residents looking to continue their education, the government offers several deductions designed to alleviate costs.
*If you are paying off student loans, you can deduct up to $2,500 of the interest paid on qualifying loans, depending on your income.
*American Opportunity Tax Education Credit offers a tax break for people who are in their first four years of college. Expenses include tuition, books, fees and supplies, and can be applied to you, your spouse or a dependent. The maximum credit is $2,500 per eligible student.
Healthcare
Healthcare in the U.S. can be expensive, so there are several credits and deductions available.
*Eligible medical and dental expenses can be deducted for federal taxes, provided they are more than 7.5 percent of your adjusted gross income and are not paid by insurance or certain other forms of reimbursement. Note that the expenses must have been paid or charged in the current tax year.
*Qualifying taxpayers who work for themselves can deduct certain health insurance premiums for the entire family — provided you’re not able to access a subsidized employer plan. This applies to you, your spouse, dependents and even kids under 27.
Donations
If you’re able to help make life better for others, the government wants to make things easier for you.
*For qualifying donations of cash, property or goods, taxpayers can deduct up to 60 percent of their adjusted gross income. The amount of deduction depends on income and the IRS-qualified organization, so be sure to investigate to see if a donation or non-profit organization qualifies.
Gambling loss
Surprisingly, if you’re trying your luck at the casino — and losing — you can deduct your losses as long as they don’t exceed your winnings. For example, if you lose $10,000 but win $15,000, you can only deduct $10,000 for federal taxes.
While tax deductions and credits can involve a bit of digging, investigating and double-checking to ensure accuracy, the tax savings can be significant, making it well worth your time. When in doubt, consult an account or other tax prep expert to make sure you’re following the IRS rules.
DISCLAIMER – This content is for informational purposes only, it may become outdated, and we make no representations or warranties as to its reliability, accuracy, or applicability. Enova International Inc. and its subsidiaries, which includes Pangea and its affiliates, do not provide legal, tax, financial, or accounting advice. You are encouraged to contact your financial professional or tax advisor for more information.
