Welcome to part five of Money Under 30’s “No-Stress Guide To Filing Your Taxes.” Today we are going to take a deeper look at our available deductions.
- Your tax document checklist: A guide to get you started
- Choosing the best method to file your return
- Tax software: When to use and how to choose
- Tax schedules (itemizing, capital gains, business income, etc.)
- Don’t miss…a credit and deduction checklist
- Special situations (audit avoidance, extentions, payment plans, and estimated payments)
Everybody wants some tax breaks…or a few more. When it comes to taxes these breaks—credits, adjustments, and deductions—are always your friend. They’ll lower your bottom line, reducing the amount you owe or increasing your tax refund.
So it’s important to have a grasp of what tax breaks are available and which ones you might qualify for. This is one of the major glitches in even the best tax return software programs—they don’t know about every detail of your financial lives. They can present a list of sections for you to navigate, but you need to know where to look to get the breaks you qualify for and deserve. To help you get familiar with these tax breaks, we’ll break down the most common ones below.
Before we start, take note of this simple rule that many people do not understand: all tax breaks are not created equal. Tax credits, deductions, and adjustments are not the same! These are three completely different things that do different things to your tax return. That said, here’s a list of tax breaks that may matter most to your return:
Adjustments are found in the second section of your 1040 form. These adjustments will be deducted from your Total Income to arrive at your Adjusted Gross Income (AGI).
Student Loan Interest. Cursing your seemingly never-ending student loan payments? Good thing there is a tax adjustment available for this expense. You’ll receive a 1098-E form in the mail listing the amount of interest you paid and you should include this with your return. You cannot claim this adjustment if you’re married and file separately or can be claimed as a dependent of someone else. Your AGI must be below $75,000 if you’re single and $150,000 if you’re married and file jointly. The maximum deduction you can take is $2,500. For more detailed information you check out the IRS website.
Self-employment Adjustments. Freelancers rejoice for self-employment adjustments! Every freelancer or sole proprietor that pays tax via the Schedule SE will be able to deduct one-half of the self-employment tax amount as an adjustment – no questions asked.
Tuition and Fees. If you attended a higher-education school during the year, you may be eligible for up to a $4,000 adjustment for the cost of tuition and fees. You can get more detailed information about this here.
Moving Expenses. If you got a new job (or first job) this year and had to move more than 50 miles for your new job, you can claim an adjustment for your moving expenses on your return. In general, these expenses include transportation, hotels and lodging, parking, and tolls.
Jury Duty. Got called in for jury duty this year but had to turn over your pay to your employer? In general, if your employer pays you for the days that you were on jury duty, they’ll require that you turn over your jury duty pay to them. But the IRS requires that you include this income on your taxes. Never fear, though, you can include the amount you earned in your total adjustments on line 36 of your 1040 form. Just attach documentation to your return and annotate “Jury Pay” next to line 36.
Deductions are simply itemized deductions, which we discussed last week. You can only claim deductions if you itemized deductions (instead of taking the standard deduction) and fill out Schedule A. Deductions include the biggies like mortgage interest, property/state/local taxes, and charitable deductions, but it also includes those obscure Miscellaneous Deductions, which are explained in more detail below.
Mortgage Interest. This expense alone is usually what swings a taxpayer from choosing the standard deduction over itemized deductions. Make sure you include your 1098 form – the form that shows the amount of mortgage interest you paid – with your return.
Personal Property Taxes. Do you own a home and live in a county with high property taxes? You can finally reap the benefit on your tax return by deducting the total amount you paid in property taxes for the year. This also includes any other property taxes you paid, like cars or boats.
State Income Tax vs. Sales Tax. When you itemize, you can choose to deduct state income tax or sales tax. How do you decide? The general rule is that if you live in a state that does not have state income taxes (or if you think you paid more in sales tax than in state income tax), you are eligible to deduct your state sales tax instead. Don’t worry—you don’t have to keep every receipt you’re given throughout the year; the IRS has a calculator on its website to help you determine how much sales tax you can deduct.
Miscellaneous Deductions. As I explained last week, there’s a whole host of small expenses that are called Miscellaneous Deductions that you can claim as itemized deductions. The catch is that you can only deduct the amount that exceeds 2% of your AGI. If your AGI is $50,000, you can only deduct expenses after the first $1,000 (50,000 x .02 = 1,000). The list of miscellaneous deductions goes is quite long, but below are the major ones that are most likely to bump you over the threshold:
- Tax preparation fees
- Job-search costs
- Union Dues
- Unreimbursed Business Expenses
- Courses/Training to improve current job skills
Credits are quite possibly the most beneficial tax break, but also the hardest to come by. Credits are literally subtracted right from the total amount of tax you owe. This is different from adjustments and deductions which are subtracted from your income rather than the actual tax you owe. Remember how awesome the Making Work Pay Credit from 2010 was? That was because it a tax credit and directly lowered your tax bill.
Child Care Credit. When people call newborn babies a new tax deduction or credit, they’re not joking. Children can definitely reduce your tax bill. To claim the care credit, the person receiving the care must be your qualified dependent and the care must be provided so you or your spouse can work. If you’re a stay-at-home mom who needs extra help, unfortunately, you won’t be able to claim this credit. If you are married and file separately, you won’t qualify for the credit. Finally, you are only allowed to claim up to 35% of the expenses you incurred.
Child Tax Credit. You could receive up to $1,000 per child off your tax bill, depending on certain factors. First, the child must be your dependent, under age 17, live with you for more than half the year, you provide more than half of their support and must be a U.S. citizen. This credit is limited based on your AGI, starting at $110,000 for married taxpayers and $75,000 for all other taxpayers.
Education Credits. There are two Education Credits and they are:
- The American Opportunity Credit. This credit was created by the American Recovery and Reinvestment Act (ARRA) of 2009 and was extended through 2017. The American Opportunity Credit essentially modified the already-existing Hope Credit. This credit is available for up to $2,500 in expenses paid for the first four years of college. The newly modified version of the credit is popular because the income limitations are higher – starting at $160,000 for married taxpayers and $80,000 for single taxpayers.
- The Lifetime Learning Credit. This credit is a big one because it helps out those taxpayers who are, well, lifetime learners. There is not a limited number of years you can claim this credit and you can claim up to $2,000 in qualified expenses (tuition, fees, books, supplies). You cannot claim both the American Opportunity Credit AND the Lifetime Learning Credit — you must choose one or the other. This credit has more income limitations than the American Opportunity Credit. You can get more details here.
Any questions about this list of tax break? Let me know!
Next in the No-Stress Guide to Filing Your Taxes: Special Situations: Audits, Extensions, Payment Plans, and Estimated Payments.