A tax deduction is an amount reduced from the tax payable amount of an individual. Tax deductions are usually a part of the taxpayer’s expenses during the year. The IRS allows some tax deductions that can be removed from the taxpayer’s income, to ensure that they do not have to pay taxes on these expenditures.
There are hundreds of tax deductions listed out by the IRS, that can be claimed by the taxpayer. However, most taxpayers are unaware of the tax deductions that they can use to avoid being charged with a high ta bill. To ensure that you are paying the right amount of taxes you are liable to, we have compiled a list of various tax deductions and how to claim them.
There are two ways in which a taxpayer can claim tax deductions. Either they can claim the standard deduction set up by the IRS, or they can get separate tax deductions of their various expenses. This separate deduction is called itemizing deductions.
The taxpayer must choose the deduction method depending upon which amount is higher between the two. The higher the amount of deduction, the lower the tax bill.
A standard deduction is a saving grace offered by the IRS, to those who cannot itemize their tax return. Every one is liable to a standard deduction, whether they have any other tax deductions or not. Hence, those taxpayers who have no specific deductions, can simply claim a standard deduction and benefit from it. The processing of standard deduction claims is fast and you do not need to fill out too many forms to make the claim.
In the year 2019, the standard deduction for single tax filers was $12200. Married tax filers filing separately could claim $24400, whereas those filing together could claim $18650. The standard deductions for the year 2020 are expected to increase by $200. Senior citizens above the age of 65 receive a standard deduction that is $1300 higher than that for single filers. Hence, they can claim $13500 as a standard deduction. Whereas, a single filer who is unmarried or someone whose spouse has died can claim $13850 in deductions.
However, if your itemized deduction is higher than the standard deduction set by the IRS, you must itemize your deductions. This will be a time taking process, but you will be able to save a generous amount on your tax bill.
Most people who have a mortgage debt or home equity loan should try to evaluate their itemized deductions. Chances are, you can save more money on itemized deductions in such a scenario. It is in your best interest to find your taxable income by trying both the claim methods separately.
If you do not have the knowledge of tax deductions that you are entitled to, then you could end up paying more than your tax liability. An accountant that specializes in taxes or a licensed tax advisor could help you determine the deductions that you can claim. You could also use taxation software and answer all the tax deduction questions that are put up to you. In the end, you will receive your tax payable amount after deducting itemized deduction, for comparison.
Ten Of The Most Common Itemized Tax Deductions
- Deduction On Student Loan: If you had to finance your college or university education by taking a loan, then you could claim a tax deduction on the interest paid by you. Tax deduction on a student loan can be up to $2500. If your taxable income is $70000 or above, the deduction amount will go down.
Moreover, if you had to take this loan for your spouse, your child, or some other dependent person, then you could still claim this tax deduction.
- Mortgage Deductions: Interest on the first $750000 of your mortgage debt, is subject to tax deductions. This is a relief offered to homeowners so that they can manage their credit from their income. The interest amount on the mortgage can be deducted from your gross income.
People who took mortgage before Dec 15, 2017, can get a deduction on the first $1 million of their debt.
- Healthcare: If you have a Health Savings Account for unexpected medical expenses, then you can get tax deductions on your monthly contributions for the same. Moreover, taking money out of such accounts to pay medical expenses is tax-free. The contribution amount for the 2019 tax filing can be $3500.
Moreover, if a taxpayer‘s medical expenses were so high that they amount to over 7.5% of their income, then they can file for a tax deduction on medical expenses. People who are battling diseases like cancer and those who have undergone expensive medical surgery can claim this tax deduction.
- Deductions For Self Employed People: Unlike people employed by various companies, self-employed people like freelancers and contractors do not have a regular source of oof income. The taxes of an employed person are paid in two parts, half by the individual and the other half by the employer. However, because self-employed people do not have an employer, they could be subject to 15.3% taxes. To relieve self-employed people from this, the Federal state allows them a tax deduction of half the taxes. This means that they pay a tax of 7.65%, just like any other employed person.
- Self-employed people and small business owners that have a retirement plan from a selected list of plans, can get deductions on the contribution amount.
- If you have rented a home to carry out your business activities, then you can receive a deduction on the rent paid, maintenance costs, etc.
- Deduction for low-income artists: Similar to the deduction for self-employed people, if you are a performing artist then you can get some tax deductions on your work expenses. To qualify for this deduction you must be able to prove that you have performed at multiple places or events and that 10% of your income is spent on building your career a performing artist. Your income should not be more than $16000.
- Deductions For Us Army Officials: Army officials that have to move their entire household, have to bear a lot of expenses during the move. Because these expenses are borne by them to follow the orders of their supervisors, the IRS offers a tax deduction on these. To claim this deduction you must fill the IRS Form 3903 and Schedule 1.
- According to Schedule 1, members of the reserve forces for the military can claim deduction on their tax expenses if they had to travel for more than 100 miles for work.
- Charity Deductions: If you have made donations that a foundation or organization that is exempt from taxes, then you can claim a deduction on the charity amount. Depending upon the type of donation, the deduction can be up to 20%, 30% or even 60% of your income.
- Alimony Payments: Alimony payment is considered to be the income of the receiving spouse, whereas it is a tax deduction from the income of the paying spouse. If your divorce was effect before 2018, then the Alimony payments made by you can be deducted as a tax deduction. However, the rules have been changed for this deduction from the year 2019.
- Deduction on property rental and side income: If you are renting your personal property like a car or some appliances, and earning a side income from it, then you can claim some deduction for expenses like fuel.
- Winning At Olympics: If you have represented your country in some Olympic sport and won medals, then you receive the prize money and some money from the Olympic & Paralympic Committee. This money can be deducted from your gross income, as you earned it by bringing glory to the US.
Do you currently owe over $10K in taxes to the IRS? Call us today and apply to tax relief.
To claim Itemized deductions, you need to have proof of these expenses. The process of filing a tax return with itemized deductions can be hectic. There are many IRS forms to be filled and attached. By hiring an accountant to handle your taxes, you can ensure that all the relevant deductions are claimed and filed in an error-free manner.