Things to Deduct on Taxes
There is one simple rule in tax preparation: deduct everything you can legally deduct and don't deduct anything else. It seems simple enough in theory, but in practice, it can be hard sometimes to decide what you can and cannot deduct. On a very basic level, you need to keep in mind three types of "deductions" that can all reduce your tax bill: (1) income exclusions, (2) itemized deductions and (3) credits.
Other People Are Reading
-
Income Exclusions
-
Technically speaking, an income exclusion -- also called an "above the line deduction" -- is not a deduction at all, but rather a total exclusion from your income. As a practical matter, it has the same result, which is that it lowers your taxable income. Exclusions, however, can be claimed even if you don't itemize deductions. Common exclusions include student loan interest, IRA or 401k contributions (Roth accounts excluded) and alimony or child support payments.
Itemized Deductions
-
After you claim all your income exclusions, you have the choice to itemize your deductions or claim the standard deduction. The smart thing to do is to calculate your itemized deductions, if they are greater than the standard deduction, claim the itemized deductions. But, if the itemized deduction total is less than the standard deduction, ignore your itemized deductions and claim the standard deduction instead. A deduction, like an exclusion, reduces your taxable income. Common itemized deductions include business expenses, charitable donations, mortgage interest paid and tax preparation fees.
-
Credits
-
A tax credit is the best tax benefit because a credit is a dollar-for-dollar reduction in your tax liability. Gather all your income for the year and come up with a gross income amount, say $70,000. Reduce that amount by all income exclusions, say $5,000, and then by all itemized deductions (assuming they are more than the standard deduction), say $13,000, which leaves your "taxable income" at $52,000 (70,000 minus 5,000 minus 13,000). If you are in a 20 percent average income tax bracket, you will owe $2,600 (52,000 times 20 percent) in taxes. Then, claim your tax credits, say $1,500 in credits. To claim your credit, subtract the total credit ($1,500) from your taxes owed ($2,600), which leaves you with a final tax liability of $1,100. Common tax credits include the Child Care Credit, the Child Tax Credit, the Earned Income Credit and educational credits (the Hope Credit and the Lifetime Learning Credit).
Refundable Credits
-
Technically a refundable credit is just a specific type of tax credit, but because they can be so beneficial, they merit their own section of discussion. Tax credits come in two forms: refundable and nonrefundable. A refundable credit means that even if you pay zero taxes for the year, you can still receive a tax refund. Say your taxes owed are $400, but you qualify for a refundable Earned Income Tax Credit equal to $4,400, you will pay zero taxes and you will still receive a tax rebate for the excess $4,000. Not all credits are refundable. The Earned Income Tax Credit is the most commonly claimed refundable credit.
Keep Receipts
-
One of the most important tax tips to keep in mind, all year round, is to keep a written record of all potential exclusions, deductions and credits. For example, if you want to claim the charitable mileage credit for the miles you put on your car, you need to keep a written record of the trips you take for charitable purposes. Or, if you want to claim a deduction for charitable contributions, you need to get a receipt from the organization that you donate to, and the receipt needs to show what items you donated and the fair market value of those items. In short, keep receipts and all other written records to support whatever tax write-offs you claim.
-
