If you’re new to the corporate world, the first question that comes to mind is, “What are tax deductions and how can I qualify for it?” Before we get to that, paying taxes is a tradition every American must fulfill. In doing so, you uphold your duty to the United States government and hopefully, save some money too. For the latter part, here’s how you can do just that.
What are Tax Deductions | A Walkthrough for Taxpayers
Deductions are a way of reducing your taxable income. Your “taxable income” is the amount of money you make on which the government can tax you. Taxable income includes money you make at work. It also includes rental income or inheritances. Basically, if it’s not tax-free income, it is taxable. The IRS tallies up your taxable income then it decides what rate to tax you at according to your tax bracket and charges accordingly.
It stands to reason, then, that if you want to save money, you must reduce that taxable income. That’s where tax deductions come in. A deduction is an amount you’re allowed to subtract from your taxable income. In some cases, that amount is standardized, and in some, it is itemized. With the new changes in tax laws, standardized deductions have become much more common.
Standard tax deductions have existed for a long time. They are also known as write-offs. One of the most commonly leveraged deductions is the standard deduction. This can be taken for personal or married filing jointly. You can also take an exemption for each person on the return. If you file alone, that’s just one exemption. If you have a family, it can be up to four or seven or more, depending on the number of members.
2018 is bringing some changes. From here on out, the standard deduction and personal exemption are being rolled together. These changes won’t affect returns until the 2019 filing year.
Note that deductions are not the same as credits. The child tax credit, earned income credit, retirement contribution credit, and child and dependent care credit are all examples of money automatically refunded to you. It offsets your taxes dollar for dollar. On the other hand, deductions reduce taxable income but do not offset taxes straight across.
Many other deductions exist. In the coming years, most people who receive a W2 won’t have to worry about them. Taking the standard deduction will be more profitable in the vast majority of cases. In relatively rare circumstances such as involving rental properties, you may still find it more effective to itemize.
However, people who work for themselves will most likely continue to itemize. That’s because tax write-offs for self-employed people can total significantly higher offset amounts. This means you come up with a list of tax deductions to offset your income. Those might include:
- Sales tax: You can deduct state income tax and sales tax from the amount on your federal return.
- Health insurance: Paying for your own insurance is a hit most self-employed folks have to take. If you pay for health insurance for others, this is a great way to reduce taxable income.
- Charitable gifts: If you make gifts to charities or other nonprofits, you can deduct them from your income.
- Babysitter costs: If you volunteer for a charity or other positions where you don’t earn money, you may be able to deduct childcare costs. Think of working at the library, a local job fair or a community college.
- Continuing education: Traditionally, this is a deductible expense.
- Business expenses: You’ll find a huge number of business expenses deductible. This includes driving miles. It also includes going out with clients, the technology you buy for work, and even your home office space.
- Job searching: If you were out of work, you can deduct any search-related expenses. The must total should be more than 2 percent of your adjusted gross income that year.
Here’s another comprehensive guide to tax deductions courtesy of Khan Academy:
Doing taxes is hard. No doubt about that. But understanding deductions is key to saving money and doing your return the right way. If you’re not sure where to go from here, talk to Tax Relief Center. We strive to give individuals and families the knowledge and help they need to succeed financially. With the correct tax insights, you can make significantly better options for your present and future. We can even help you with tax relief options if you need them. Curious to learn more? Get in touch.
Have you experienced claiming tax deductions before? Share your experience in the comments below!