Tax season has wrapped and if you’re like most Americans, you’re doing everything you can to make sure as much money as possible stays in your wallet next year – that is where tax credits and deductions come into play!
But first, let’s get a couple things straight. We’ll be covering two different things – a tax deduction and a tax credit. These two things are commonly confused and can make a big difference in your return. So what’s the difference?
A tax deduction reduces your amount of taxable income for the year, while a credit helps reduce the amount of taxes that you actually pay. Deductions usually come in the form of a percentage, whereas credits are a flat-dollar amount.
Alright, let’s dig in!
12 valuable tax deductions
Let’s start with deductions. When preparing your taxes, you can choose to take the standard deduction or itemize your deductions. According to the IRS, more than 60% of taxpayers take the standard deduction, which could be leaving money on the table. If your deductible expenses are more than $5,700 for singles or $11,400 for married couples (jointly filing), consider itemizing instead.
Below, you’ll find several deductions you should consider when doing your taxes, from college expenses to health premiums.
- College costs – Families can deduct up to $4,000 of college tuition and fees (through 2011). However, if your adjusted gross income is between $65,001 and $80,000 as a single person or between $130,001 and $160,000 as a joint filer, you have a reduced deduction of up to $2,000.
- 529 college savings plan – These are a great way to put away money for your childrens’ education, while saving money in taxes. This year, Internet access and computers are considered a “qualified education expense,” so they can be paid for tax-free.
- Educational materials – If you’re a K-12 teacher, you can deduct up to $250 for classroom expenses like books, supplies, and computer equipment.
- Sales and income tax – You can write off either your sales tax or income tax. If you live in a state like California or New York that has a high income tax, it’s probably to your benefit to claim sales tax instead. Additionally, states like Florida, Washington, and Texas don’t have income tax so be sure to take the sales tax deduction when filing.
- Student loan interest – If a child isn’t claimed as a dependent, they can deduct up to $2,500 of student loan interest that’s paid by parents.
- Mileage – Miles driven for work can be a huge deduction that saves you quite a bit of money. You can claim 50 cents per mile for business, 16.5 cents per mile for moving and medical, and 14 cents per mile for charitable.
- Charitable giving – The percentage of charitable contributions that can be deducted is based on your tax rate. Be sure to keep tedious records of all cash contributions including a canceled check, name of the charity, and bank records that state the charity’s name, date, and the amount of the donation.
- Home refinancing – Any points paid to refinance your home is deductible over the life of the loan. For example, if you refinance for 20 years, you can deduct 1/20th of the points each year.
- Last year’s tax return – If you paid money to the government last year, make sure to deduct it on your return.
- Tax software and fees – Any fees you paid to a tax attorney or spent on tax software can be deducted – just be sure to keep good records.
- Job-hunting costs – Job-hunting costs can be deducted (up to 2% of your adjusted gross income if your job is in the same line of work as you were doing previously). These include things like employment agency fees, printing costs of resumes and business cards, postage, and travel expenses if an interview took you away from home overnight.
- Investment losses – Up to $3,000 of investment losses can be deducted against your income (if your losses exceed your gains).
6 tax credits to save you money
Now that we’ve covered deductions, there are also a lot of tax credits available for this year’s taxes that can help your wallet. These fall into categories like home improvement, education, energy efficient upgrades and more. We’ve outlined the general guidelines for these credits, but be sure to check with your tax professional or the IRS website for specific restrictions when you file taxes online.
- Child and dependent care credit – This includes any expenses paid for the care of children under 13, or a disabled spouse or dependent, to allow you to work or look for work. You can claim up to $1,050 per child or $2,100 for two or more children. The credit for 20-35 percent of your childcare expenses up to $6,000.
- Child tax credit – This is for people with qualified children (up to $1,000 per child), and can be claimed in addition to the child and dependent care credit. To qualify, children must be under 17 at the end of the tax year.
- American opportunity tax credit – Students can get a $2,500 higher education credit for their first four years of college. This includes 100 percent of the first $2,000 spent on tuition, books, and related expenses; and 25 percent of the next $2,000 spent.
- Making work pay credit – This credit is equal to 6.2 percent of your earned income, with a maximum of $400 for singles or $800 for married joint filers. For single filers, the credit phases out between $75,000 and $95,000 adjusted gross income; for joint filers, between $150,000 and $190,000.
- Earned income tax credit – This is a refundable credit for those who have earned an income from wages, farming, or self-employment. Age, income, and the number of qualifying children determine the amount of the credit. To qualify, married couples filing jointly must have an earned income of less than $48,362 and singles under $43,352.
- Saver’s credit – This credit is designed to help those with a low to moderate income save for retirement. If your income is below a certain limit and you contribute to a workplace retirement plan or IRA, you may qualify.
Using even a few of the deductions and credits listed above can save you a lot of money during the upcoming 2011 tax season. For additional details on the credits and what’s eligible, contact your tax professional.