You work hard for your paycheck. It may seem like your take-home pay is small because so much is withheld for taxes, but taking a little extra time to explore your eligible tax deductions and credits can help you get some of that hard-earned pay back into your pocket.
A tax deduction cuts the amount of your income that is taxed. You may file your tax taking a standard deduction — a flat-dollar reduction in your adjusted gross income or AGI. For the 2019 tax year, a single person or a married person filing separately qualifies for a $12,200 deduction, a married couple filing jointly qualifies for $24,400.
But some people are better off filing itemized deductions because their individual circumstances allow for multiple deductions that may add up to a bigger tax return check. Itemizing your deductions takes time and requires extra forms. It also requires proof that you’re entitled to the specific deductions. In other words, it’s smart to plan ahead and keep your expenses organized.
Tax credits are dollar-for-dollar reductions in your actual tax bill. Some credits are refundable, which means if you owe $250 in taxes but qualify for a $1,000 credit, you’ll get a check for the difference of $750. (Most tax credits, however, aren’t refundable.)
Be sure to investigate all your deduction and credit possibilities. (There are hundreds.)
1. Student loan interest deductions.
If you paid interest on student loans in 2019, you may deduct up to $2,500 of the interest you paid from your taxable income. Student loan interest is actually not an itemized deduction. You’ll find it “above the line” on your tax form, so the amount is subtracted to lower your taxable income.
Even if you take the standard deduction, you should still take the student loan interest deduction. As an example, if you are in the 22% tax bracket, the maximum student loan interest deduction will give you $550 back in your return. You can take the deduction whether the loan is for your own education or whether you have taken a loan for another person, such as a child.
2. Self-employment expense deductions.
If you are self-employed, a contractor, or provide freelance services, there are many expenses that you can deduct from your taxes.
If you work out of your home, you can deduct a portion of your mortgage or rent, utility costs, property taxes, and maintenance. You can also deduct health insurance you purchase for yourself and your family, car expenses and mileage, and contributions to your individual 401(k) retirement plan.
3. Child and Dependent Care Credit.
You can qualify for child and dependent care tax credit of 20% to 35% of up to $3,000 of child care for a child under 13, an incapacitated spouse or parent, or another dependent (and up to $6,000 of expenses for two or more dependents) so that you can work. Qualifying expenses can extend to household expenses, including paying someone to help with cooking and cleaning.
Credit may not be claimed if the care provider is your spouse, the parent of the dependent child, a dependent listed on your tax return, or your child who is age 18 or younger, even if not listed as a dependent on your tax return.
4. American Opportunity Tax Credit.
If you’re an undergraduate college student or a parent of one, you can lower your tax bill by up to $2,500 if you paid that much in undergraduate education expenses last year. The American opportunity tax credit allows you to claim the first $2,000 you spent on tuition, books, equipment and school fees, plus 25% of the next $2,000, for a total of $2,500. Living expenses and transportation are not included in this credit.
As a student, this credit may be claimed on your taxes for a maximum of four years. Parents can claim the credit if you paid for a student’s education expenses and that student is listed as a dependent on their tax return.
5. Teacher classroom expenses. Full-time K-12 teachers can deduct up to $250 of any classroom expenses that were paid out of pocket. You can find this as an above-the-line tax deduction. Potential qualifying expenses could include classroom supplies, books you use in teaching, and software you purchase and use in your classroom, just to name a few.
For many people, a tax refund is their once-a-year opportunity to take a big financial step — to pay down debt, to build savings or start investing, to buy a car or fund a vacation. Your friends at Regional Finance can help you supplement your refund to take care of your goals. Learn more with these tips to help you get your finances in order. For more information on taxes read here.
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