Tax Deductions That You Can Claim When Filing Your Taxes

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.

Standard Deduction

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.

Itemized Deductions

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

  1. 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.

  1. 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.

  1. 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.

  1. 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.
  1. 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.
  1. 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.
  2. 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.
  1. 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.
  1. 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.
  1. 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.
  1. 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.

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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.

Tax Relief; A Perk or A Necessity?

Tax is the obligation we pay to live in the civilized world. The system has established over centuries and every country has its own tax system now which may vary from country to country depending on the social and economic condition of the country.  However, the system sometimes allows the taxpayers with exemptions or reliefs if they fall in a certain category or class.  Tax relief is essentially the relaxation, removal or reduction of the liable tax payment that would otherwise be payable as a civic duty. The relief or otherwise called exemption can either be waved off completely or partially based on the rules established. The relief is usually allowed to promote a particular community of the sector or product to save the beneficiary from either to default or to grow. Certain medical products may get exemption from the tax to make sure its availability or an under performing sector may enjoy an exemption for a particular time period to get itself established.

The tax exemption can also be used as a tool to encourage a particular behavior or to increase spending in a specific category. For example, the charity paid or the donation made to a charitable organization which is regulated and registered may get relief from the amount payable as tax.

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There are many approaches that are adapted by the tax authorities. The exemption basically is the exception to an established rule and should not be considered as the non-existence of the rule or liability. One may argue that the reduction in the payable tax or exemption is the perk which is designed to provide unjustified benefit to the beneficiary but we have to keep in mind that the tax system, in its very nature, is a tool to establish an enabling environment for the economy. If the tax relief is not offered to anyone who may need it, then it will destroy the very fabric of the system. In the nutshell a tax system is designed for organizations, businesses and individuals to contribute for the betterment of the system by paying a predefined portion of their income they earn within the system. But sometimes the businesses or individuals need to be on the receiving end to keep contributing to the system otherwise the system will struggle to run. The tax relief is simply a tool to achieve the balance in the economic system.

Common Terms That Every Taxpayer Should Know About

If you are a working individual with an income above the taxable income decided by the IRS, then you are subject to paying annual taxes to the state. Taxes are complicated and nonpayment of taxes could get into some serious trouble with the IRS or the Internal Revenue Services. To manage your taxes efficiently, it is important to have some knowledge about commonly used taxation terms. To help you in the task, we have explained some common terms, that every taxpayer should know about.

1.Tax Relief
An incentive that decreases the amount of tax a person or business entity is liable to pay to the tax authorities, is called tax relief. Tax relief is given over a cause or due to the occurrence of some specific events. For example, the government can give tax relief to its citizens after the area has been affected by a natural disaster.

Tax relief is given to people or businesses in the form of tax deductions is given to people or businesses in the form of tax deductions, forgiveness, tax credit, etc.

  1. Tax credit: When a taxpayer has accumulated tax credit, it is directly decreased from the tax payable amount. For example, when consumers buy environment-friendly products they often receive a tax credit. Say the credit received by them is $1000 and the tax payable is $4000. Then the amount they pay in taxes will be $3000.
  2. Tax deductions: When a taxpayer receives tax deductions, the amount is reduced from their original taxable income. They are further taxed on the remaining amount. For example, When a person donates money for a registered charity or trust, they receive tax deductions on the same.
  3. Tax forgiveness: If the financial condition of a taxpayer is bad and they are unable to pay their tax debt, then the state often provides tax forgiveness. This means that the taxpayer is only liable to pay a percentage of the tax liability.
    For example,

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If an individual is aware of all the tax relief opportunities available to them, they can save a lot of money on tax liability.

  1. Tax Debt Relief
    When a taxpayer is in no condition to pay their taxes, the IRS provides tax debt relief. In such cases, the IRS can either choose to settle the debt and recover as much of the amount as possible or start a payment plan for the taxpayer.

A tax debt relief solution is accepted only on one of these conditions:

  1. Doubtful amount of tax liability: This includes that it is justified by the taxpayer that the amount of tax they are liable to pay is incorrect and too high for them.
  2. Doubt on the collectability: A taxpayer qualifies for this condition when the IRS agrees that their financial condition will not allow them to make full payment of the tax debt.
  3. Effective Tax Administration: When the taxes are correctly calculated and the individual is capable of paying the outstanding amount in the future but will have to go through guaranteed hardships due to a certain reason, the IRS can decide to provide tax debt relief.

There are two types of debt relief options provided by the IRS. The most effective solution for a taxpayer is found, after studying their financial condition, future finances, the total amount of debt, and so on.

  1. Setting up a Payments Plan
    If the financial condition of the taxpayer is bad but manageable, then the IRS can decide to give the taxpayer more time to make the full payment. This is done by setting up a payment plan for the taxpayer. If you will be paying the outstanding amount within 120 days, then you will get a short term plan, and if you’ll need more time, then you will be given a long term payment plan. As per these payment plans, the money can be paid by check, automatically from the account, or through a debit card. If you are paying the IRS in the long term, then you will be subject to some plan setup fee.
  2. Tax Settlement
    When a taxpayer is deep into tax debt, and it is unlikely that they will be able to pay the tax authorities, the authorities can decide to settle the debt by taking only a segment of the actual liability. In order to start settlement negotiation with the IRS, one must send an Offer In Compromise or OIC to the concerned authority. A tax settlement is usually given in cases where it is evident that the taxpayer is in no condition to be able to pay the amount. The motto behind a settlement is to receive whatever amount is recoverable.

When a tax debt is settled early, the taxpayer is able to avoid liens, wage garnishments, levying of bank accounts. A tax settlement can save the taxpayer from getting penalties and paying high interest.

OIC or Offer In Compromise: Studies show that people that use an Offer In Compromise usually end up paying less than 20% of their actual tax amount. IRS will only accept an OIC if the taxpayer is in no financial condition to make the payment, even when it is broken down into installments. You can find the instructions for an OIC in the 656-B form by IRS.

● For an OIC to work, both you and the IRS must agree that your tax debt cannot be paid with your income. IRS will only agree to this if you do not have enough assets that can be seized by the IRS for full payment of your tax debt.
● Once the IRS agrees, you can begin negotiations. At the negotiations, the highest amount that can be paid by you is determined.
● If the IRS agrees with the amount, then after the settlement, tax debt is considered to be fully paid. You no more owe any money to the tax authorities.

Sending an OIC is a complex task and any omissions in the subjection can lead to a rejection of OIC by tax authorities. When sending an OIC, taking the help of a professional accountant can help you avoid errors and ensure that the settlement proceeds quickly.

  1. Back Taxes
    Back Taxes are those taxes that are yet to be paid by the taxpayer. These taxes are subject to penalties and interest. The IRS can collect back taxes for 10 years from the taxpayer. The IRS has many programs to deal with the collection of tax from taxpayers of varying financial conditions. It includes the fresh start program, installment agreement, and tax settlement.

When you have back taxes, the IRS has the right to recover the money, in many different ways. One of the most effective ways to recover back taxes is wage garnishment.

IRS Wage Garnishment: When you have unpaid taxes, then the IRS has the authority to instruct a third-party to deduct money from your wages. The third-party involved in this process is usually the employer of the taxpayer. By deducting a specific amount of money from the tax debtors account, the IRS recovers the unpaid taxes. This is called IRS wage garnishment. The reason behind IRS wage garnishment is to prevent the taxpayer from withdrawing the salary and spending it on miscellaneous tasks instead of clearing their debt.

Other than garnishing your wages, the IRS also has the authority to levy bank accounts and even seize your assets. Wage garnishment can also be done for nonpayment of child support, bankruptcy, and defaulted student loans.

  1. Filing Taxes
    Every individual or business, whose income is above the taxable income is required to file their taxes every year. The tax liability of a taxpayer is determined after they have filed their taxes with correct information of their income. Moreover, when you file a tax return, it is calculated whether you owe more tax to the state then you’ve already paid, or you could either get a tax refund pertaining to the tax deductions.

There are three ways to file your taxes:

  1. IRS form: By filling information about your income in Form 1040, provided by IRS, you can file your taxes manually. However, without the knowledge of taxation and tax deductions, you could end up paying more money than your tax liability.
  2. Tax Software: A tax software is detailed and asks multiple questions from the taxpayer, to efficiently evaluate their tax liability. It can even electronically file Form 1040 for you.
  3. Professional accountant: Accountants and tax preparers have knowledge of various tax benefits, rules, and penalties. They can help you evaluate your tax liability, focusing on legally minimizing your taxes and ensuring on-time filing.

If you do not have the knowledge required to efficiently manage your taxes, it is in your best interest to hire a professional accountant. A professional accountant that specializes in taxation, can help you in minimizing your tax liability and filing of your taxes, free of errors. Moreover, if you are unable to carry the financial burden of your taxes, then they can help you by negotiating the payment amount with the concerned authority or IRS.

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