When it comes to paying taxes, nobody wants to pay more than they have to. Fortunately, the tax code allows for a wide range of tax deductions that can reduce your taxable income and save you money. Tax deductions are simply expenses that you can subtract from your taxable income, and they can make a big difference in how much you owe in taxes each year.
Tax deductions come in many different forms and can apply to various groups of taxpayers, including individuals, small businesses, and self-employed individuals. However, with so many deductions available, it’s easy to overlook some of the most valuable ones. In this article, we’ll explore the top 10 tax deductions that you might be missing out on and how you can take advantage of them to keep more of your hard-earned money.
Standard Deduction
The standard deduction is a flat amount that reduces your taxable income based on your filing status. For 2021, the standard deduction is $12,550 for single filers, $25,100 for married filing jointly, and $18,800 for the head of household filers.
Claiming the standard deduction is usually the simplest and most straightforward way to reduce your taxable income, especially if you don’t have a lot of itemized deductions. You don’t have to keep track of your expenses or submit any receipts to claim the standard deduction. Instead, you can simply claim the amount that corresponds to your filing status on your tax return.
However, it’s important to note that you can’t claim both the standard deduction and itemized deductions in the same year. You’ll need to choose the one that gives you the most benefit, and for many taxpayers, the standard deduction is the way to go.
Itemized Deductions
While claiming the standard deduction is often the easiest option, some taxpayers may be better off itemizing their deductions. Itemized deductions are expenses that you can subtract from your taxable income, but unlike the standard deduction, you have to keep track of your expenses and submit them to the IRS.
Itemized deductions can include a wide range of expenses, such as charitable donations, medical expenses, state and local taxes, mortgage interest, investment expenses, and more. To claim itemized deductions, you’ll need to file Schedule A with your tax return and provide documentation to support your expenses.
The main benefit of itemizing deductions is that you can often deduct more than the standard deduction, especially if you have a lot of qualifying expenses. However, itemizing deductions can be time-consuming and may require more effort than claiming the standard deduction.
If you’re considering itemizing your deductions, it’s important to keep track of your expenses throughout the year so you have the necessary documentation when tax time rolls around. It’s also a good idea to talk to a tax professional to determine if itemizing your deductions is the best strategy for your individual tax situation.
Deductions for Individuals
Individual taxpayers are eligible for a range of tax deductions that can help reduce their taxable income. Here are some of the most common deductions that individuals should be aware of:
A. Charitable Donations
Donations made to qualified charitable organizations are tax-deductible. This can include cash donations, as well as donations of goods and property. However, to qualify for the deduction, you must itemize your deductions and provide documentation to support your donations.
B. Medical Expenses
Medical expenses that are not covered by insurance can be deducted from your tax return, including the cost of doctor visits, prescriptions, and medical equipment. However, you can only deduct medical expenses that exceed 7.5% of your adjusted gross income (AGI) for the year.
C. State and Local Taxes
Taxpayers can deduct state and local income, sales, and property taxes on their federal tax returns up to a maximum of $10,000. However, taxpayers who claim this deduction cannot also deduct the total amount of their property and income taxes.
These are just a few examples of the deductions that individual taxpayers can take advantage of. It’s essential to keep track of your expenses and talk to a tax professional to ensure that you’re maximizing your deductions and minimizing your tax liability.
Deductions for Small Businesses
Small business owners are also eligible for a range of tax deductions that can help reduce their taxable income. Here are some of the most common deductions that small business owners should be aware of:
A. Home Office Expenses
If you use part of your home for business purposes, you may be able to deduct a portion of your home-related expenses, including mortgage interest, property taxes, utilities, and repairs. To qualify for the deduction, you must have a designated area in your home that is used exclusively for business purposes.
B. Business Travel Expenses
If you travel for business, you may be able to deduct your expenses, including transportation, lodging, and meals. However, the expenses must be necessary and ordinary, and you must keep detailed records to support your deduction.
C. Deductions for Equipment and Supplies
Small business owners can deduct the cost of equipment and supplies that are used in the business. This can include anything from computers and software to office furniture and machinery.
These are just a few examples of the deductions that small business owners can take advantage of. It’s crucial to keep detailed records of your expenses and consult with a tax professional to ensure that you’re maximizing your deductions and minimizing your tax liability.
Self-Employed Tax Deductions
Self-employed individuals are eligible for a range of tax deductions that can help reduce their taxable income. Here are some of the most common deductions that self-employed individuals should be aware of:
A. Retirement Plan Contributions
Self-employed individuals can deduct contributions to a retirement plan, such as a SEP-IRA or solo 401(k). The contribution limit is based on your income, and the deduction can be taken on your personal tax return.
B. Vehicle Expenses
If you use your vehicle for business purposes, you can deduct the expenses associated with its use. This can include gas, oil changes, repairs, and insurance. You can choose between deducting the actual expenses or using the standard mileage rate, which is 56 cents per mile for 2021.
C. Home Office Expenses
Similar to small business owners, self-employed individuals can also deduct a portion of their home-related expenses if they use part of their home for business purposes.
These are just a few examples of the deductions that self-employed individuals can take advantage of. It’s important to keep detailed records of your expenses and consult with a tax professional to ensure that you’re maximizing your deductions and minimizing your tax liability.
State and Local Taxes
Taxpayers can deduct state and local income, sales, and property taxes on their federal tax returns up to a maximum of $10,000. However, taxpayers who claim this deduction cannot also deduct the total amount of their property and income taxes.
It’s important to understand the limits and restrictions of state and local tax deductions. For example, some states have higher tax rates than others, which can impact the size of your deduction. Additionally, the $10,000 limit on state and local tax deductions may not be enough to cover all of your taxes, especially if you live in a high-tax state.
It’s a good idea to consult with a tax professional to determine the best strategy for claiming state and local tax deductions and to ensure that you’re following all applicable tax laws and regulations.
Mortgage Interest
Taxpayers can deduct mortgage interest on their federal tax return, up to a maximum of $750,000 in mortgage debt for mortgages taken out after December 15, 2017. If you have a mortgage that was taken out before that date, the limit is $1 million.
Mortgage interest deductions can be a significant source of savings for homeowners, especially in the early years of a mortgage when a larger portion of the payment goes towards interest. However, it’s essential to understand the limits and restrictions of mortgage interest deductions.
For example, the deduction is only available for mortgages that are used to buy, build, or improve a primary residence or a second home. Additionally, if you take out a home equity loan or line of credit, you can only deduct the interest if the loan is used to buy, build, or improve your home.
It’s a good idea to consult with a tax professional to determine the best strategy for claiming mortgage interest deductions and to ensure that you’re following all applicable tax laws and regulations.
Investment Expenses
Taxpayers can deduct certain investment expenses on their federal tax return, including fees for investment advice, custodial fees, and fees for investment-related publications. These expenses can be deducted as miscellaneous itemized deductions, but only to the extent that they exceed 2% of your adjusted gross income (AGI).
It’s important to know what qualifies as an investment expense. For example, expenses related to tax-exempt investments or investments that produce tax-free income are not deductible. Additionally, expenses related to investments that are held for personal reasons or that do not produce income are not deductible.
If you’re not sure whether an expense qualifies as an investment expense, it’s a good idea to consult with a tax professional to ensure that you’re following all applicable tax laws and regulations.
Charitable Donations
Charitable donations can be deducted on your federal tax return as long as you donate to a qualified charitable organization. To claim the deduction, you must itemize your deductions and provide documentation to support your donations.
It’s important to understand the rules and limitations of charitable donations. For example, the deduction is limited to 60% of your AGI for cash donations and 50% of your AGI for donations of property. Additionally, you cannot deduct the value of your time or services or the value of blood donations.
To ensure that your donations qualify for the deduction, it’s important to donate to qualified organizations and to keep detailed records of your donations, including receipts, canceled checks, and acknowledgment letters. It’s also a good idea to consult with a tax professional to ensure that you’re following all applicable tax laws and regulations.
Medical Expenses
Taxpayers can deduct medical expenses on their federal tax return as long as the expenses exceed 7.5% of their AGI. Medical expenses can include a wide range of costs, such as doctor visits, prescriptions, and medical equipment.
It’s important to understand what qualifies as a medical expense. Generally, a medical expense is any cost that is necessary to diagnose, treat, or prevent a medical condition. This can include expenses for dental and vision care, as well as costs for long-term care.
It’s essential to keep detailed records of your medical expenses throughout the year, including receipts and statements from medical providers. It’s also a good idea to consult with a tax professional to ensure that you’re following all applicable tax laws and regulations and to ensure that you’re claiming all eligible medical expenses on your tax return.
Other Miscellaneous Deductions (BONUS)
There are several other tax deductions that taxpayers may overlook when filing their tax returns. Here are a few examples:
A. Job Search Expenses
If you’re looking for a new job, you may be able to deduct certain job search expenses, such as the cost of resume preparation and travel expenses related to job interviews.
B. Continuing Education Expenses
Taxpayers who are looking to further their education may be able to deduct certain expenses, such as tuition, books, and supplies. To qualify for the deduction, the education must be required by your employer or be necessary to maintain or improve your skills in your current job.
C. Child Care Expenses
Parents who pay for child care so that they can work may be able to deduct the cost of care. The deduction is limited to a percentage of the amount paid, depending on the taxpayer’s income.
D. Moving Expenses
Taxpayers who move for work may be able to deduct certain moving expenses, such as the cost of hiring a moving company and transportation costs.
E. Legal Fees
In some cases, taxpayers may be able to deduct legal fees related to the production or collection of income or to the determination, collection, or refund of any tax.
It’s important to keep track of all potential deductions throughout the year and to consult with a tax professional to ensure that you’re taking advantage of all available deductions and credits. By maximizing your deductions and credits, you can help reduce your tax liability and keep more of your hard-earned money.
Conclusion
Tax deductions can be a valuable tool for reducing your tax liability and keeping more of your hard-earned money. By understanding the various deductions that are available and keeping detailed records throughout the year, you can maximize your deductions and credits and help reduce your tax bill.
Here’s a recap of the top 10 tax deductions that people often miss out on:
- Standard deduction
- Itemized deductions
- Deductions for individuals
- Deductions for small businesses
- Self-employed tax deductions
- State and local taxes
- Mortgage interest
- Investment expenses
- Charitable donations
- Medical expenses
It’s important to take advantage of all available tax deductions to reduce your tax liability and save money. By working with a tax professional and keeping detailed records, you can ensure that you’re following all applicable tax laws and regulations and maximizing your tax savings.
FAQ
A: A tax deduction reduces your taxable income, while a tax credit reduces your tax liability. For example, if you have a $1,000 tax deduction and your marginal tax rate is 20%, you will save $200 in taxes. However, if you have a $1,000 tax credit, you will save $1,000 in taxes.
A: It’s always a good idea to consult with a tax professional if you’re not sure whether you qualify for a tax deduction. A tax professional can help you understand the rules and limitations of each deduction and can help you determine whether you’re eligible.
A: If you miss a tax deduction on your tax return, you may be able to amend your return to claim the deduction. It’s important to keep accurate records throughout the year so that you don’t miss any deductions.
A: A tax deduction and a tax write-off are the same thing. They both refer to expenses that can be subtracted from your taxable income to reduce your tax liability.
A: No, you cannot claim tax deductions if you take the standard deduction. Tax deductions can only be claimed if you itemize your deductions on your tax return.
