Tax deductions and credits are the best way for taxpayers to reduce their tax liability each year. But many individuals miss out on these big tax breaks. Learn about the most commonly missed tax deductions and credits, and see if you could be keeping more of your money.
Tax deductions and credits are the best way for taxpayers to reduce their tax liability each year. But many individuals miss out on these big tax breaks simply because they don’t know they’re available, or they think they don’t qualify. Keep reading to learn about some of the most commonly missed tax deductions and see if you could be keeping more of your money.
Deductions for Homeownership
If you’re a homeowner, there are several different expenses associated with owning a home that are actually deductible on your tax return every year. These include:
In addition to these regular deductions, you may also deduct certain types of home improvement expenses. Home upgrades that are necessary for a medical condition (for example, adding a ramp to the front of your home for accessibility purposes) can be deducted on your return, as can interest on home equity loans used to improve or repair your home.
The American Opportunity Credit
While a tax deduction reduces your taxable income, a tax credit gives you back even more money by reducing your tax bill dollar for dollar. One commonly missed tax credit is the American Opportunity Credit, which provides a major tax reduction for those that are paying for college tuition and other educational expenses.
Whether you’re paying for your own schooling or for your child’s education, the American Opportunity Credit can give you back 100% of your first $2,000 in qualifying college expenses, and 25% of the next $2,000 for an annual credit of $2,500. This credit can also be used for multiple students in the same household.
Lifetime Learning Credit
Credits for furthering your education aren’t limited to full-time college students. If you’re investing in your education by taking training courses or night classes, you could receive a credit worth up to 20% of the first $10,000 in education and training expenses—or, in other words, up to $2,000 per year.
Deductions for Charitable Contributions
Most taxpayers know that charitable contributions are tax deductible. However, far fewer taxpayers actively track all of their donations to deduct them on their return. While large cash donations are rarely missed (they’re easy to note on bank statements and simple to keep track of), smaller donations of both cash and non-cash items often get overlooked. However, these can add up over time and result in significant deductions if you’re willing to track them all.
For example, most people have donated used items to local charities. But have you ever gotten a receipt for those donated items? Every item donated has a value, no matter how small, which can be added up with your other itemized deductions for the tax year. So get those receipts, write down the estimated value of your items (being careful not to overestimate), and keep track of those records until it’s tax time.
For working parents, the childcare credit can make an enormous difference in relieving their tax burden each year. The cost of childcare is quite high, with most parents spending nearly $10,000 each year for professional care of just one child. The childcare tax credit can give parents back up to 35% of those costs when you file your return—that’s $3,500 off your tax bill every year. If you’re a working parent that relies on professional childcare, make sure you don’t miss out on this credit.
To Itemize or Not to Itemize?
All of these deductions, of course, are only relevant to you if you itemize your tax deductions. When the Tax Cuts and Jobs Act was signed into law in 2017, it roughly doubled the size of the standard deduction, making it more beneficial for most Americans to simply take the standard deduction, rather than itemizing.
However, it’s important that you still accurately track all of your deductions and credits to determine if it’s worth the time to itemize your deductions on your return. The standard deductions for 2021 are as follows:
If you track your deductions and notice that itemizing will allow you to get more back on your tax return, you can file your itemized deductions and further reduce your taxable income, in addition to claiming all of the tax credits that you qualify for. If you need assistance tracking your tax deductions to get the biggest benefit possible on your return, contact Peacock & French today to work with one of our experienced CPAs.