8 Legal Ways to Unlock Tax Deductions and Tax Credits
Every taxpayer wants to pay taxes as little as possible. You can do it in numerous legal ways without raising red flags to the government, whether it’s the IRS or the state. You can decrease your tax in these simple ways.
- One, lessen your adjusted gross income by removing non-taxable sources of revenue.
- Two, increase your tax deductions.
- Lastly, find out if you’re eligible for tax credits and a tax refund.
A tax credit directly reduces your tax dues in a dollar for dollar basis. A tax deduction and tax credit aren’t the same, but both reduce your tax payment.
So, let’s discuss in detail the eight legal ways to unlock your tax deductions and tax credits.
Identify Above-the-line Deductions
An above-the-line deduction reduces your adjusted gross income (AGI). The IRS allows you to remove the non-taxable sources of income. Here are above-the-line deductions and see if one or more items are part of your gross income:
- Moving Expenses
- Retirement Plan Contributions
- Health Savings Account
- Health Insurance premiums
- Self-Employed Business Expenses
- Interest on student loans
- Tuition and Fees, which are different deductions from a lifetime learning credit
Remember, your AGI determines the tax bracket you can use. A lower AGI qualifies you for higher tax deductions.
Understanding Tax Brackets
The tax computation is a progressive one. It means you’re using more than one tax rate. So, if your bracket falls in the 22% rate, you’re going to get the fixed amount for the 10%, 12%, and 22%. Add the figures, and that’s your tax due to the government.
Check Your Expenses Yearly
The government allows flexibility with the type of deduction to use. You can use a standard deduction this year and itemized deduction the next year.
So, before checking, take a moment to recompute all your itemized deductions. These itemized deductions might be higher than the standard or the other way around.
What are the allowable deductions if you opt for itemized deductions?
You can deduct medical expenses, which are not covered by insurance. These expenses should exceed the 7.5% threshold. To get this threshold, divide the amount of actual expenditure by your AGI for the taxable year.
State and Local Tax Deductions
The max for SALT deductions is $10,000 for joint filers and $5,000 for single or married filing separately. SALT deductions include state and local taxes or sales taxes plus property taxes.
Other itemized deductions are charitable contributions and mortgage interest. You could deduct charitable contributions up to 60% of your AGI. One rule is you made the donations to qualified charitable organizations.
Bunch up Your Tax Deductions
Pay your property taxes or donate in January and December. The government is strict with charitable contributions. Make sure to check the lists of qualified institutions before giving.
Sometimes, the government removes the limit on charitable contributions. An example is a donation made to California wildfires’ victims. So, watch out for these instances.
Charitable Contributions: Limits and Considerations
You can’t deduct these contributions if you made them to an individual. If you donated property, you can’t include the appraisal fees as tax deductions.
Also, you can’t include the value of your service for participating in a charity cause as tax deductions. Lastly, you can’t deduct charitable contributions if you receive a financial benefit.
Inspect Your Vehicle Registration Fees
Many residents register their vehicles annually. If you’re one of them, you can add the registration fees to your tax deductions. But, the registration fees must meet the three criteria.
The fees are annual and are based on the value of the property. Lastly, the property is personal and movable. Examples of personal and movable properties are cars, planes, boats, motorcycles, and RVs.
So, check your registration fees. See if you can include it as SALT deductions. Remember, this tax deduction is part of the $10,000 maximum for SALT deductions.
Perform Work-at-Home Jobs
Home office deduction might be complicated, but it’s worth understanding how it works. If you have a work-at-home job, you can include some expenses related to this job as tax deductions. The two magic words are exclusively and regularly.
Expenses are internet and phone bills, workspace cost, home depreciation, and mortgage interest. Travel expenses and meals related to it can also be eligible for home office expenses.
The first criterion is that you are away from home for more than a regular workday. Second, the expense is related to the business.
Consider Filing Jointly
Filing a joint return unlocks some tax credits. Joint filing applies to married couples who are earning low to average income. When filing joint returns, you can unlock five tax credits.
- Earned Income Tax Credit
- American Opportunity
- Lifetime Learning Credit
- Child and Dependent Care Tax Credit
- Exclusion or credit for adoption expenses
Aside from these tax credits, filing jointly as a couple increases allowable deductions. You can avail twice the amount of a standard deduction. Instead of getting a standard deduction of $12,200, you can get $24,400. Moreover, you can claim higher above-the-line deduction compared to filing separately.
How to Choose
To decide, prepare two tax returns. One return should reflect your tax when joint filing. Another return computes the taxes for filing separately.
You can use an automated tax preparation to see the difference. Just make sure to provide correct information to get accurate results.
Choose the method that’ll bring bigger tax savings in your pocket.
However, there are some limitations. You can’t claim American Opportunity and Lifetime Learning credit at the same time. You choose either standard or itemized deduction, but not both.
Determine if Your Eligible for Tax Credits
The government creates tax reforms every year, and the newest is the Tax Cuts and Jobs Act (TCJA). This act removes the personal exemption but increases the standard deduction.
Yet, these reforms shouldn’t keep you from exploring your eligibility for tax credits. These credits can reduce your tax to $0 and earn you a refund, depending on the type of tax credits.
Types of Tax Credits
Non-refundable tax credits reduce your tax liability but no refund. Dependent care credit, saver’s tax credit, and mortgage interest credit are examples.
Partially refundable credit reduces tax obligations and entitles you to a refund. You can receive a partial refund of up to 40% of the tax credit or $1,000, whichever is lower. The American Opportunity is an example of a partially refundable tax credit.
A refundable tax credit reduces your tax and qualifies you for a refund for the unused amount. The best examples are the Earned Income and Premium Tax Credit.
Look for Miscellaneous Deductions
TCJA scraps some miscellaneous deductions such as hobby expenses and unreimbursed employee expenses. However, the act still retains some tax deductions.
You can still deduct gambling losses. Another miscellaneous deduction is casualty and theft losses on business properties. These properties should be earning an income to be considered.
Unfortunately, moving expense is only deductible for taxpayers who serve the military. TCJA removed this privilege for new employees from 2018 to 2025.
Another miscellaneous deduction to consider is investment interest. The investment interest arises when you borrow money and use it for investments. However, you need to add the dividend and capital gain on the investment as part of your taxable income.
Save up for Your Retirement
Many average earners don’t have a retirement savings account. If you haven’t saved a dollar yet, start now. Why? Because you can treat your contribution as an above-the-line deduction. Plus, you can avail saver’s tax credit of up to 50% or a maximum of $1,000 (single filers) or $2,000 (joint filers).
Contributions to IRA, 401(K) retirement plan, and SEP IRA are above-the-line deductions. Your contribution to ROTH IRA isn’t an above-the-line tax deduction.
But, you can enjoy a tax break later on. You can make tax free withdrawals from these contributions upon retirement.
Your contribution to ROTH IRA isn’t an above-the-line tax deduction. But, you can enjoy a tax break when you make tax free withdrawals from these contributions upon retirement.
There are some points to remember when saving up for your retirement. The contribution to these retirement savings account has a limit, which is $6,000 for the years 2019 and 2020.
Watch out for the yearly announcement for these limits because the government changes them regularly.
Points to Remember
Taxpaying isn’t a bad experience, after all. If you take the time to read and study the tax rules, you can reduce your tax liability. Many taxpayers often overlook tax deductions and tax breaks.
But we hope our article helped you. Before we end, here are some points to remember while revisiting your income and expenses.
- You can’t itemize your deductions on some part of your income and standard on another. It’s one way or another.
- If you can’t understand the tax preparation, ask the advice of a professional accountant. A professional accountant can help you manage your personal finance. The help of a pro will make things less complicated, especially if yours is a complicated one. However, you can’t deduct tax preparation fees as a deduction to your taxable income.
- Your main objective is to decrease your AGI. Remember, your AGI is the basis of computing your tax liability and your tax deductions.
- Remember the limits on contributions and expenses to avoid overspending.