How to Maximize Tax Deductions and Credits
Paying income taxes is the civic duty of all Americans, with the money helping to pay for national defense, highways, schools and police departments, among other things.
While we’re happy to pay our fair share, no one wants to pay too much income tax. That’s where tax deductions and credits come into play.
U.S. Congress has written the tax code — all 4 million words of it — to allow individuals and businesses to claim certain deductions and credits to lower their tax burden.
Many of these deductions and credits are designed to help lower-income households, working parents, homeowners and people paying for college.
There are dozens of deductions and credits available; the trick is figuring out whether you qualify.
The first step to maximize tax deductions and credits is to understand the difference between them.
A tax deduction is a qualified expense that lowers your taxable income.
If you donate money or goods to charity, for example, you can deduct the fair market value of those donations from your taxable income.
Other popular tax deductions include:
- Home mortgage interest
- State, local and real estate taxes paid
- Out-of-pocket medical expenses
- Student loan interest
- Moving expenses related to a job
Educate yourself on the difference between the standard deduction and itemized deductions.
TaxACT calculates both the standard deduction and itemized deductions and tells you which is more advantageous.
A tax credit provides a lump sum dollar amount to qualifying taxpayers and directly lowers the amount of tax you pay.
The child tax credit. for example, pays $1,000 for each qualifying child in the household.
If you owe the IRS $3,000, but you qualify for $2,000 in tax credits, then you only have to pay the IRS $1,000.
Other popular tax credits include:
- Earned income tax credit (EITC) for lower-income working families
- Child and dependent care credit to reimburse working parents for child care costs
- American Opportunity Credit and Lifetime Learning Credit to help cover the cost of college
- Homeowner credits for energy-efficient improvements like solar panels and wind turbines
It’s a good idea to learn about all of the tax deductions and credits available to you.
Learn about the tax credits and deductions specifically designed for parents, homeowners, lower-income workers, small businesses and families paying for college on the TaxACT Blog or by visiting IRS.gov .
If you’ve experienced a major life change like having a baby, buying a home or moving for a new job, TaxACT Life Events will walk you through the tax implications of them.
Once you have a better idea of all of the tax deductions and credits available, you will know what records and receipts to keep during the tax year.
- If you want to qualify for a higher-education credit, for example, keep track of your tuition statements and receipts for books.
- If you have vehicle expenses for your business, keep a mileage log.
- If you pay for doctor’s visits or medications out of pocket, hold on to itemized receipts and explanations of benefits.
TaxACT Free Federal Edition finds all the deductions and credits you are entitled to for the largest possible refund. It’s the most complete free tax filing solution for everyone. Start free now .Source: blog.taxact.com