List of Tax Deductions and Credits
Tax deductions and tax credits are two ways to reduce the amount of tax that you owe when you file your tax return. However, the way they reduce your tax bill is different. Tax credits reduce the amount of tax you owe, while tax deductions only reduce your taxable income. For example, if your tax rate was 25 percent and your total tax bill was $5,000, a $1,000 tax credit would reduce your tax bill to $4,000, while a $1,000 tax deduction would only reduce your tax bill by $250.
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Energy Efficiency Tax Credit
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The energy efficiency tax credit is offered to individuals who install energy-efficient home improvements. For the 2010 tax year, the value of the tax credit is 30 percent of the cost. The credit is capped up to $1,500 for windows, insulation, heating, non-solar water heating systems, air conditioning, ventilation, doors, metal and asphalt roofs and biomass stoves. For 2011, the tax credit and cap have been reduced to 10 percent, capped at $500 in improvement costs, or a specific amount ranging from $50 to $300 depending on the improvement.
If you installed geothermal heat pumps, solar power cells or water heaters, windmills or fuel cells in 2010 or 2011, there is no cap on the 30 percent tax credit. In fact, this credit as been extended through Dec. 31, 2016.
Medical and Dental Expenses
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If you are itemizing your tax deductions, and your out-of-pocket medical and dental expenses exceeded 7.5 percent of your annual Adjusted Gross Income, the excess amount is tax-deductible. For example, if your AGI for the year is $50,000, 7.5 percent of that is $3,750. Assume you paid $5,000 in medical expenses and an additional $2,000 for dental work directly out of your pocket for the year. If you take the $7,000 in medical and dental expenses and subtract the $3,750 (representing 7.5 percent of your AGI), you are left with a $3,250 tax deduction.
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Charitable Donations
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You can also deduct donations you make to charitable organizations as an itemized deduction. The deduction for charitable contributions is equal to the value of the donation minus any tangible rewards received in return for the contribution. For example, if you donated $4,000 and received a free night at a hotel valued at $100, your deduction would be $3,900.
Mortgage Deductions
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If you have a mortgage, you can deduct the interest that you pay on it as long as the loan was used to acquire your home. For mortgages that originated before Oct. 13, 1987, all of the mortgage interest is deductible. For mortgages originating after that date, only the interest on the first $500,000 is deductible. This limit increases to $1 million if your filing status is married filing jointly. You can also deduct the interest on the first $50,000 of a home equity loan no matter what the loan was used for. The limit doubles to $100,000 if your status is married filing jointly. Mortgage interest is an itemized deduction.
Student Loan Interest
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Student loan interest is an above-the-line deduction, meaning that you can take the deduction without giving up the standard deduction. In order to claim the deduction, you must have used the proceeds from the loan for qualified educational expenses like tuition and mandatory fees. You can claim the deduction if your adjusted gross income is below $150,000 if you are married and file a joint return, or if your adjusted gross income is below $75,000 for any other filing status.
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