Can I Claim My Expenses for My Income Tax?
Knowing what expenses you can claim on your income taxes may make a big difference in the kind of refund you get from the IRS. This information will also help you make informed decisions during the tax year in regard to what loans to pay off and what expenses to make. In one example, you may be faced with two loans, so figuring out which loan to pay off and knowing which one you can deduct on your income taxes will help you make better decisions and keep more money in your pockets.
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Self-Employed
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The IRS allows self-employed people to claim almost all business expenses on their income tax returns. If they buy a computer for their business, then they will be able to deduct the computer expense on their income taxes. They can also deduct all or a part of their rent expense. Deducting electricity and other utilities may also be allowed. Basically, for businesses, the IRS allows deductions of anything that is used to generate or help generate revenues.
Education Expenses
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The IRS will allow you to deduct education expenses as well as the interest on education loans. There are five different types of deductions related to expense deductions: American Opportunity Credit, Lifetime Learning Credit, Tuition and Fees Deduction, Hope Credit and the Student Loan Interest Deduction. Knowing that the IRS allows the loan-interest deduction may alter your decision on what to use your available cash for, such as which loan to pay back first.
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Itemized Deductions
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The IRS allows tax payers to claim certain expenses only if they do itemized deductions. Regardless if you are self-employed or not, the IRS allows a person to deduct medical expenses in excess of 7.5 percent of the tax payer's adjusted gross income. The IRS also allows tax payers to deduct mortgage interest on their income taxes if they itemize. The IRS lets tax payers who do itemized deductions claim tax preparation expenses, as well as certain reimbursed job expenses.
Tips
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It is not wise to make your decisions just based on the tax deductions and credits the IRS allows. Otherwise, many people would have a lot of kids and stay in college forever, because deductions for kids and education are large. However, it does help to know what the IRS offers. Referring back to the loan example, if you have two loans, one car loan and one student loan, both with the same interest rate, paying off the car loan first is the best financial decision to make -- because the interest expense for the student loan is tax deductible. To estimate the effective student loan rate, take your student loan interest rate and multiply it by 1, minus your tax bracket. If you are in the 25-percent tax bracket and have a 10-percent interest rate on your student loan, your effective student loan interest rate is actually 10 percent times 1, minus 25 percent, for an effective rate of 7.5 percent.
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References
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