Tax deductions and tax credits can help you save money on your income tax, but only if you know how to apply them correctly. If you don’t understand these deductions for taxes, you could miss out on a lot of claims and end up paying a lot more on taxes.
In this article, we’ll look at the most common tax deductions and tax credits and how you can claim them to lower your tax payments or get a bigger IRS refund. Let’s get going.
Related Article: 15 Tax Deductions for a Small Businesses Owner
What are Tax Deductions?
A tax deduction is a form of incentive that reduces your taxable income and allows you to claim a bigger IRS refund. These deductions can be applied by anyone from almost anywhere in the United States.
Sometimes, the problem with tax claims is that people don’t know what deductions to claim when filing for taxes. There are many deductions for taxes available nowadays. First, you need to understand the types of tax deductions – standard deductions and itemized deductions.
What is Tax Credit?
The tax credit is an amount you can subtract directly from their income tax. Unlike tax deductions, tax credits are not about reducing your taxable income. Rather, it directly makes cuts to it. However, like tax deductions, there are also a variety of tax credits to choose from based on locations, industries, or categorization.
Common Deductions for Taxes and Tax Credits for Individuals
There are different types of deductions for taxes you can claim for organizations as well as individuals. If you are a small business owner, you can claim a different set of deductions based on your business type, location, etc. Here, let’s see the 15 most common deductions applicable to individuals.
1. Child tax credit
The child tax credit is a tax credit that grants a taxpayer a tax benefit for each qualifying dependent child (under age 17). It is aimed to help taxpayers with families and children to look after. The basic requirements for this tax credit are legal US identity proof and dependent children aged under seventeen.
2. Earned income tax credit
The earned income tax credit or EIC is intended to help low-income US taxpayers by reducing the amount of their tax. The two basic requirements for this tax credit are that you must have a low or moderate income and you must have a legal income certificate.
3. Tax credit for the elderly or disabled
This tax credit is aimed at helping elderly and/or disabled US taxpayers. The credit ranges between $3,750 and $7,500. Anyone who is aged above 65, or retired, or disabled in any way can apply for this tax credit without much of a hassle.
4. Foreign tax credit
The foreign tax credit is beneficial for taxpayers who either work in another country or have a foreign source of income. It can reduce tax liability for anyone whose income comes from a foreign source by making deductions in payroll. The basic requirement for this tax credit, again, is a legal certificate of income.
5. Business expense deduction
If you’re a small business owner, then this deduction can make a whole lot of a difference in your taxable income. Most of the expenses directly related to your business can be claimed for a tax deduction. This includes everything from utility costs and travel costs to marketing costs and beyond. To claim this deduction, you must have all the relevant documents of your business and you’ll be good to go.
6. Deductions for home office
Tax deductions for home office include all the utility costs, bills, mortgage payments, property taxes, etc. To apply for this deduction, one needs to include costs exclusive to their business. For example, if 20% of all your home’s utilities are occupied by your home office, then 20% of your annual utility costs will become tax-deductible. It is also one of the most common deductions for self-employed.
7. Property tax deduction
Property taxes based on localities are eligible for a tax deduction. A property owner following the itemized method of deductions can claim all the taxes paid for the property. However, taxes paid on a rental property are not eligible for this deduction.
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8. Sales deduction
The sales tax deduction allows you to deduct sales tax on specified large purchases. IRS’ requirements for this deduction included a legal income statement, ZIP code of your address, and record of purchases.
9. Home mortgage interest deduction
The home mortgage interest deduction allows homeowners or soon-to-be homeowners to deduct mortgage interest amount paid on up to $750,000 worth of their homes. Many types of home loans qualify for this deduction.
10. Gambling loss
Gambling losses can be claimed for a tax deduction, but only if you’re following the itemized method of deductions. Requirements for claiming this deduction include a long track of your winnings and losses, information about the people you gambled with, and the amount you won or lost.
11. Charitable contributions
Charitable contributions and donations made to relief funds and charitable institutions can be claimed for tax benefits. For that, you will need to be registered under Section 12A to qualify for the 80G certificate. Once you’ve registered, you’re good to go. With this method, not only do you get tax deductions but also get your bit to contribute to trusty institutions.
12. Marketing expense deductions
Marketing and promotional costs directly related to business activities are also tax-deductible. Qualifying costs include website expenses, social media expenses, special promotion expenses, and more.
Depreciation is one of the deductions for taxes which is mostly useful for those in the manufacturing sector. With this deduction, small business owners installing new machinery in their ventures can claim up to 20%-40% of additional depreciation.
14. Student-loan interest
Student loans or education loans can be claimed for a tax deduction. This deduction aims to help students pay their education fees easily. To qualify for this deduction, students must meet the eligibility criteria which include things like income level and filing status.
15. Healthcare deductions
Healthcare insurance policies are tax-deductible and can help lift your tax load. Under section 80D of the Income Tax Act, every individual can claim a deduction for medical insurance. This tax deduction is available for most all medical insurances and can be applied by anyone.
Tax deductions and tax credits are great opportunities for reducing your taxable income and applying them aren’t much of a chore either. With properly calculated taxes, you can get a big, fat IRS refund. Therefore, consider applying these deductions for taxes the next time you reimburse your income tax, and in case you find anything laborious, then make sure to get some professional consultation.
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