Bang for Your Buck: Top 10 Most Common Tax Deductions
Photo by Kelly Sikkema
Originally Posted On: https://bianchitax.com/most-common-tax-deductions/
We’ve all heard the infamous saying that nothing is certain but death and taxes.
And, while taxes may not be unavoidable, there are many tips and strategies for reducing what you owe to Uncle Sam each year.
Unfortunately, most people find themselves completely overwhelmed or confused by the tax system. We’re here to break down the most common tax deductions to prepare you for this tax season.
Let’s get into it!
1. Retirement Contributions
Do you contribute to a tax-advantaged account, like an HSA, Roth IRA or employer-sponsored 401(k)? If so, you may actually owe significantly less in taxes than if you chose not to contribute.
Not only is saving for retirement incredibly important, but it’s also one of the simplest ways to grow compounded money tax-free. Who doesn’t want that?
Retirement contributions are one of the most common tax deductions – and they are also some of the easiest.
The contribution is deducted from your paycheck, and the money comes out before the taxes do, which reduces your overall taxable income.
2. Home Mortgage Interest
Proud homeowner? We hope so! Owning a home can require tremendous upfront and routine costs, but it can actually benefit you when it comes to tax time. Your purchase creates an opportunity for some common tax deductions.
Homeowners can usually claim their home mortgage interest deduction for interest paid on a loan secured by your home. You must have an ownership interest in the home, and you must be required to pay the loan.
If you pay more than $600 in mortgage interest per year, your lender will issue you a form 1098, which indicates the total interest you paid during the year and any mortgage insurance premiums you paid.
While restrictions may apply, you can typically deduct these amounts on your taxes.
3. Medical and Dental Expenses
Did you schedule lots of doctor appointments or take new medication this year? It turns out you can deduct the expenses for the diagnosing, curing, treating, or preventing medical diseases.
That means you can typically deduct the cost of co-pays or insurance for physicians, dentists, surgeons, and other specialty medical professionals.
You can also associate other related medical fees, including travel costs (parking fees, ambulance, gas mileage).
Medical and dental expenses are subjected to the new 10% rule, which means you can deduct qualified expenses if they exceed at least 10% of your total adjusted gross income.
If you already participate in a Health Savings Account (HSA) or Flexible Spending Arrangement (FSA) and used these funds to pay for your medical expenses, you cannot claim another tax deduction. That’s because these funds are already withdrawn on a tax-free basis.
Consult with your accountant if you’re unsure about qualified expenses.
4. Charitable Donations
Not only does it feel good to give to organizations in need, it feels good to receive the tax break as well.
Charitable donations are considered one of the most common tax deductions for lowering your tax burden. With that said, you will need to keep a few rules in mind:
Choose the right charity: You must donate to a qualified charitable organization to deduct the contributions from your taxes. Unsure if the charity is qualified? Ask to see a letter from the IRS or check their website to see if one is posted. This will confirm the organization’s status.
Itemize: To actually claim a charitable deduction on your tax return, you need to itemize your deductions.
Individual handouts don’t count: Even if you give a dollar to the homeless man at the corner or buy a candy bar to support a local cause, you cannot deduct the contributions. Again, that’s because tax deductions only work through qualified organizations.
Hold onto receipts: No matter the amount, you need to get a receipt that includes the date, amount donated, and the organization name. You will need to hold onto this in case of an audit.
Time itself doesn’t count: Volunteering your services does not inherently warrant a tax break. However, any expenses related to volunteering (such as a uniform, training manuals, or parking expenses) can be deductible.
Some limits apply: If you contribute more than 20% of your adjusted gross income, you need to pay attention to limits. These limits are outlined by the IRS.
5. Income Taxes Paid
Income taxes may seem confusing. However, you can typically deduct any state and local income taxes paid during the year.
You cannot deduct state and local income taxes you pay on income that is exempt from federal income tax – unless the exempt income is actually interest income.
You can deduct withheld taxes and estimated tax payments. However, you cannot deduct federal income taxes or employment taxes, like Medicare and Social Security.
6. Tuition and Fees
Headed back to school? Even if you’re not getting a free academic ride, education is one of the most common tax deductions for taxpayers and their families.
Even if you just take one class, you may be able to deduct the expenses on your tax via the American Opportunity Tax Credit. With this credit, you can receive up to $2,500 per eligible student.
You must meet the following criteria to be eligible:
- Be pursuing a degree or other recognized educational course
- Be enrolled at least half-time for at least one academic period (semester, trimester, or quarter) during the tax year
- Not have finished the first four years of higher education during the tax year
- Not have claimed the credit for more than four years
- Not have any drug-related felonies
Students will typically receive a Form 1098-T from their school. This form can help determine the credits.
Take advantage of these common tax deductions and get back to learning!
7. Job Searching Expenses
Nobody likes getting laid off from work. As you probably know, job searching expenses can add up, and that’s why they represent one of the most common tax deductions.
If you were looking for a job over the past year, you can deduct the costs related to your job search, even if it didn’t land you a job.
The IRS lists a few items to consider:
- Expenses are tax-deductible if the job search is in the taxpayer’s current line of work
- You can deduct costs associated with preparing and mailing a resume
- You can deduct travel expenses (transportation, meals, lodging)
- You can deduct job placement fees
Report job searches on Schedule A of a 1040 tax return as miscellaneous deductions. They can be claimed if it is more than 2% of the adjusted gross income.
8. Gambling Losses
Didn’t win big in Vegas this year? Your losses can still be deductible if you itemize your deductions.
Note that your amount of losses cannot exceed your amount of winnings (which also need to be reported as taxable income).
For example, if you won $5,000 in winnings and had $8,000 in losses, you can deduct a maximum of $5,000. Make sure to hold onto all documentation such as receipts and tickets.
9. Child Care Credit
Parents can claim child and dependent care credit to help subsidize costs of after school daycare or pre-school. This can also include summer day camp costs.
You can claim this credit regardless of your income. To qualify for this credit, you must meet the following criteria:
- The child must be age 12 or under during the tax year
- Your spouse, if unable to take care of themselves, has lived in the home for at least half the year
- Any other dependents claimed cannot take care of themselves and have lived in your home at least half the year.
You or your spouse must have “earned income.” If you are married, you also must file a joint tax return. Finally, you need to provide the name, address, and Taxpayer Identification Number of the person or place providing the care.
10. Home Business Expenses
Run a business or freelancing company out of your home? It’s one of the most common tax deductions you can have.
Business owners can deduct ordinary, necessary business expenses that are “common” and accepted in your particular trade or business.
This includes some of the expenses that go into the total cost of goods sold (cost of products, storage, labor costs, overhead).
If you have an expense for something that is partially used for business and partially used for personal purposes (like a vacation), you can deduct the percentage that you use for your business.
You may also be able to deduct the part of your home you use for the business as well as your car and insurance.
Final Thoughts on Common Tax Deductions
While nobody loves the idea of forking over their hard-earned money to the government, paying taxes is a concept that’s here to stay.
Fortunately, you don’t have to do all the tedious legwork by yourself. At Rochester Tax Preparation & Accounting Services, we are here to help you.
Contact us today for all your tax-related needs and concerns. We’re happily accepting new clients today.