Income Tax Deductions and Tax Credits
What is a Tax deduction?
Tax deductions reduce how much you pay in taxes by lowering your taxable income. You’re simply subtracting how much of your income is taxed and reducing how much you owe in taxes.
What is a Tax Credit?
Tax credits cut your taxes dollar for dollar. So, a $1500 tax credit cuts your final tax bill by exactly $1500. Tax credits have two main categories: refundable and nonrefundable. If you have a refundable $700 tax credit, but you owe only $300 in taxes, you will receive a $400 tax refund. On the other hand, if you have a nonrefundable tax credit of $700, but you only owe $300 in taxes, you won’t get a $400 tax refund.
Here are some of the most common tax deductions and tax credits that many taxpayers can utilize:
- Business Use of Home
Self-employed taxpayers who use their home as part of their business or work from home, can use a portion of their mortgage or rental expenses, utility costs, maintenance and other expenses on their business schedule C.
- Sales and Income Taxes
You have the option of deducting sales taxes or state income taxes off your federal income tax. This can be a big money saver for individuals who live in a state that does not have its own income tax. If you made a big purchase like a car, the sales tax break might be a better deal, even if you paid state income taxes. You have to itemize to take the deduction rather than take the standard deduction.
- Health Insurance premiums
Deductible medical expenses have to exceed 7.5 % of your adjusted gross income (AGI) to be claimed as an itemized deduction for 2019. That is why you should be checking to see which medical care expenses on your Income tax return can be deducted.
- Charitable gifts and expenses
When you donate cash or property to your favorite tax-exempt organization, it can be claimed as a tax deduction. You can deduct charitable giving up to 60% of your taxable income. Make sure you keep records and receipts of all your donations. You can also deduct noncash or in-kind donations as well, under certain guidelines.
- Student Loan Interest
If you have been paying your student loans, you can claim a student loan interest deduction of up to $2500.
- Lifetime Learning Credit for College tuition and training costs
If you are pursuing your college degree or taking classes to improve your job skills, you might be able to claim a tax credit called Lifetime Learning Credit up to $2000 if your income does not exceed certain limits. To claim this credit for certain education expenses, you will need to file form 8863.
- Credit for Energy saving home improvements
Residential Energy Efficient Property Credit which can be claimed by making your home more energy-efficient. Currently, you can get a 30% credit for 2019 qualified solar electric systems and qualified solar water heaters. For year 2020 you will get a 26% credit.
For more information on Income Tax deductions and credits you may also visit the IRS website:
https://www.irs.gov/forms-pubs/about-publication-17-part-5-useful-items