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Taxpayers can take advantage of numerous contributions and deductions on their taxes each year that can help them pay a lower amount of tax or receive a refund from the IRS.
There are two main types of deductions: the standard deduction and itemized deductions. Here’s how they differ and how you can choose the right path for your situation.
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Common itemized deductions
Itemized deductions are expenses that you can subtract from your adjusted gross income. These expenses often encourage certain behaviors or help meet expenses – the deduction of mortgage interest paid on a home loan and property taxes incurred on housing are intended to promote homeownership, says Daniel Fan, Managing Director, head of wealth planning at First Foundation Advisors, a financial institution based in Irvine, California. Deductions are also allowed for charitable contributions and the payment of certain medical expenses. Here are some of the most common deductions that taxpayers itemize each year.
1. Property taxes
Under the Tax Cuts and Jobs Act (TCJA), all state and local income taxes (SALT), including property taxes, are limited to $ 10,000 in deductions. You can deduct state and local income taxes paid (if you don’t own a home) instead of state and local income taxes, but you cannot deduct both.
2. Mortgage interest
The the interest you pay on your mortgage can be deducted and is limited to interest on $ 750,000 of mortgage debt for debts incurred after December 15, 2017.
3. Taxes paid by the State
You can deduct income taxes paid by the state, but it is capped at $ 10,000 and includes all state and local income taxes.
4. Real estate expenses
You can deduct mortgage loan insurance premiums, mortgage interest and property taxes you paid during the year on your home.
5. Charitable contributions
You can deduct charitable cash contributions up to 60% of your adjusted gross income. Donations of items or goods are also considered itemized deductions.
For 2020 and 2021 only, the CARES law allows people who have donated money to various charitable, educational, scientific or literary organizations due to the coronavirus pandemic to benefit from a deduction of up to $ 300 for 2020 – and this can be taken in addition to the standard deduction and does not have to be itemized.
6. Medical expenses
You can deduct $ 0.17 per mile for medical purposes like driving to doctor or hospital appointments. If you complete Form 1040, you can only deduct the amount of your medical and dental expenses that exceeds 7.5% of your adjusted gross income. The expense must have been paid in 2020, unless it was debited to a credit card (in which case you can deduct the expense in the year you debited the card, and not necessarily the year you paid it off. ).
7. Lifetime Learning Credits Education Credits
The Lifetime learning credit allows people to earn credits to take courses at a community college, university, or other higher education institution. The maximum amount of expenses you can deduct is $ 10,000 for an unlimited number of years. However, the maximum credit you can receive is $ 2,000 per tax return.
The credit provides a dollar for dollar reduction in the amount of taxes owed. Expenses may include tuition, tuition, and books or supplies required for post-secondary education for yourself, your spouse, or your dependent child. The credit is non-refundable, which means the credit can be used to pay the taxes you owe, but you can’t get the credit back as a refund.
The credit amount begins to decrease if your modified adjusted gross income (MAGI) exceeds a certain threshold ($ 59,000 if single or $ 118,000 if married, joint filing). The credit is not available once your income exceeds certain amounts ($ 69,000 for single, $ 138,000 for married, joint declaration.) Note: this credit cannot be claimed in the same year as the U.S. opportunity tax credit whether the expenses are claimed as a lifelong learning credit.
8. American Opportunity Tax Education Credit
The U.S. opportunity tax credit gives credits for the first four years of higher education. The maximum annual credit is $ 2,500 for each eligible student. If the amount of taxes you owe is zero because of this credit, the IRS says that 40% of any remaining credit amount (a maximum of $ 1,000) can be refunded to you. The credit is worth 100% of the first $ 2,000 of eligible education expenses paid for each eligible student and 25% of the next $ 2,000 of eligible education expenses.
“If you, your spouse, or your child is in school, be sure to take a closer look at education credits,” Fan said. “For students who are in their first four years of college, this credit could offer greater tax savings than the Lifetime Learning Credit.
Eligible expenses include tuition, tuition, and books or supplies required for post-secondary education for yourself, your spouse, or your dependent child. The credit is reduced if the modified adjusted gross income is between $ 80,000 but less than $ 90,000 for a single filer and $ 160,000 but less than $ 180,000 if the filing is joint. This credit cannot be claimed in the same year that the lifelong learning credit is claimed.
9. Retirement credits
Contributions you make to a retirement plan such as a 401 (k) or traditional plan or Roth IRA give you a tax credit of 50%, 20% or 10%, depending on your adjusted gross income that you report on Form 1040. All rollover contributions are not eligible for the credit.
The maximum contribution amount eligible for the credit is $ 2,000 ($ 4,000 if the bride and groom deposit jointly), which makes the maximum credit of $ 1,000 ($ 2,000 if the bride and groom deposit jointly). The IRS has a table to help you calculate your credit.
10. IRA contributions
The maximum contribution for 2020 in a Traditional or Roth IRA is $ 6,000, plus an additional $ 1,000 for people 50 years of age or older. Your contributions to a traditional IRA are tax deductible.
11. Self-employed health care premiums
If you are self-employed, you can deduct 100% of the health insurance premiums you pay monthly for yourself, your spouse and your dependents, whether or not you detail the deductions, explains Robert Charron, CPA in charge. from the tax department at Friedman, a New York-based accounting firm.
If you have children and they were under 27 at the end of 2020, you can also deduct their premiums, even if they are not dependent.
However, you cannot claim this deduction if you are eligible to participate in an employer-sponsored health plan of you, your spouse, dependents, or children under the age of 27.
Your long-term care insurance premiums may also be eligible for the deduction, but there are limits depending on your age and the cost of your premiums.
12. Interest on student loans
The maximum student loan interest deduction is $ 2,500. If you are single and your AGI is greater than $ 80,000, or you are married, filing jointly and your AGI is greater than $ 165,000, you cannot deduct your student loan interest.
What is the standard deduction?
The standard deduction is an automatic deduction from your taxable income that you can collect without making itemized deductions.
If you are trying to decide whether to use the standard deduction amount or trying to get more by making itemized deductions, it is important to remember that under former President Donald Trump a new tax law was introduced. , known as the Tax Cuts and Jobs Act (TCJA) from the 2018 tax year. This law “significantly increased the amount of the standard deduction for households filing together and singles filing alone,” Fan said.
The standard deduction for joint filing nearly doubled to $ 24,800 for the 2020 tax year, up $ 400 from the previous year. The standard deduction increased to $ 12,400 in 2020, up from $ 200 for single taxpayers and married people filing separately. For heads of households, the standard deduction will be $ 18,650 for the 2020 tax year, an increase of $ 300.
Before the adoption of the TCJA in 2017, the amount was $ 6,350 for single filers and $ 12,700 for married spouses.
“Since the standard deduction amounts have increased so much, it is more difficult for people to have enough expenses to be able to itemize the deductions,” he says.
Tips for canceling contributions on your taxes
Keeping good records of your contributions and expenses in a spreadsheet throughout the year can make filing taxes much faster and easier.
“Preparing and organizing everything for your taxes can seem like a daunting task, but a lot of people run into the same common mistakes,” says Fan. “Remember to always include all sources of income, be sure to research and include all possible deductions and understand the difference between a deduction and a credit. “
Some of the common mistakes people make are as follows, Fan says:
- Do not list all income
- Disregard all possible deductions
- Not fully understanding the difference between deductions and credits
- Do not take advantage of contributions to retirement accounts to increase tax deductible contributions.
Know what expenses can be deducted, and then keep proper records, he says. If you are unlikely to itemize the deductions, this exercise is not important.
To see if you can possibly itemize your deductions, add up the ones that are likely to result in the largest deduction, including:
- Mortgage interest deduction
- Charitable deduction
- State and local income taxes (includes property tax and state income tax, capped at $ 10,000)
“If these amounts are not close to the standard deduction amount, you will probably need to take the standard deduction amount which is normally the amount provided automatically,” Fan said.
If you are filing taxes with multiple deductions, start by gathering all the appropriate documents such as Form 1098 for mortgage interest rate deductions. For other deductions based on expenses or contributions, keep accurate records.
“If you itemize your deductions, keep track of eligible medical expenses, charitable contributions made, or any other deductions that can be itemized,” he says. “If you are likely to benefit from the standard deduction, record keeping will not be as important. “
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