What are Tax Deductions and Popular Tax Deductions!
Tax season always seems to sneak up on us, and we fumble around trying to get all our receipts and paperwork together. Luckily, there is a silver lining when doing taxes in the form of tax deductions. If you are not sure what are tax deductions and how to get them, now is the time to learn.
What is a Tax Deduction?
A tax deduction is an amount of money that you can subtract from your adjusted gross income, or AGI, as determined by the IRS. So, a tax deduction lowers your taxable income, which in return lowers your tax bill.
How Can You Claim Tax Deductions?
There are two main types of tax deductions – a standard deduction or itemize deductions, and you can't claim both. A standard deduction depends on your filing status and it is a flat dollar reduction in your AGI. An itemizing deduction allows you to use tax deductions to lower your taxable income, and you will pay fewer taxes when you have a lot of deductible items.
Which Tax Deduction Should You Choose?
So, when it comes down to it, which type of tax deduction should you choose? The standard kind or the itemizing deduction? Well, it depends on the following:
If your itemizing deduction is higher than your standard deduction, you should choose the itemizing choice. Itemizing will save you more money, but be aware that it will take you quite some time to do the itemizing calculations. Also, you will need to prove that you are entitled to the itemized deductions.
If your itemized deduction is lower than your standard deduction, you should probably choose the standard deduction. The process for this type of deduction will be faster than the itemizing option.
Popular 2018 Tax Deductions You Should Know About
To save yourself money and lower your deductible income, you should know about some popular tax deductions:
Child and dependent care tax credit
For children under the age of 13, you can get 20% to 35% of up to $3,000 of daycare and similar costs. For an incapacitated spouse or parent, or another dependent – you can get up to $6,000 of expenses for two or more dependents.
American opportunity tax credit
The American opportunity tax credit allows you to claim all of the first $2,000 you spent on books, tuition, school fees, and equipment. Living expenses or transportation are not deductible in the American opportunity tax credit. Also, you get 25% on the next 2,000% you spend, totaling in $2,500.
If you adopted a child, you are entitled to an adoption credit. For 2018, an adoption credit covers $13,840 of adoption fees per each adopted child.
Deduction for state and local taxes
You are eligible to deduct up to $10,000 for state and local taxes; sales taxes, property taxes, state and local income taxes. If you are married, you and your spouse are entitled to a $5,000 deduction each (if you are filing your requests separately).
Gambling loss deduction
This one is surprising, but real none the less; if you lost money in gambling, you could deduct your expenses and loss to the extent of gambling winnings. So, you haven't won any money gambling, you won't be able to file for deductions on loss (for the sum of at least $100). The limit is the amount of money you won.
401(k) contributions deduction
In the U.S., the IRS does not tax the money that goes into your 401(k) plan. For 2018, you can divert up to $18,500 to your 401(k) account per each year. People who are 50 or older can funnel up to $24,500 to their 401(k) account. If you are self-employed, you can also divert find into a 401(k) account and not be deducted for it.
Health Savings Account contributions deduction
Money that goes into HSAs is deductible. If you withdraw money from your HSAs, it is also deductible (make sure you use the money you withdrew for qualified medical expenses). For 2018, if you have a family high-deductible coverage, you can contribute up to $6,900. If you have self-only high-deductible health coverage, you can contribute up to $3,450.
Lifetime Learning Credit
For 2018, you can claim back 20% of the first $10,000 you paid toward tuition and fees. The max amount you can get back is $2,000 with this tax deduction. The Lifetime Learning Credit is not applicable for transportation and living expenses, but it can be applied for supplies or books you need for your coursework.
Charitable donations deduction
If you choose to itemize your tax expenses, you might be eligible for subtracting the amount you spent of charitable gifts (property or cash) from your taxes.
Mortgage interest deduction
A mortgage tax deduction helps homeowners purchase homes more easily. how? Because the mortgage tax deduction lowers, the federal income tax qualifying homeowners have to pay by reducing their taxable income. The taxable income is cut down by the amount of mortgage interest homeowners pay.
Self-employment expenses deduction
Freelances, contractors and other self-employed people can get many tax deductions from the IRS.
Home office deduction
For those of you who use a part of your home as an office regularly and exclusively for the business-related activity you are eligible for a tax deduction. The IRS allows people with a home office to wrote of certain expenses, like real estate taxes, associated rent, utilities, and other related costs.
Earned Income Tax Credit
For the year 2018, you can get between $519 and $6,431 on your earned income. The deduction you are eligible for depends on your marital status, how many children you have, and how much you make a year. If your AGI is less than $55,000, you should check out how much you can get in earned income tax deductions.
So, there you have it; now you have a better idea of what is a tax deduction and what popular tax deductions you can get. For further information and additional tax deductions, click HERE for the official IRS website.