Did you know that when you pay taxes, there are ways to save money and get some of it back? These are called tax deductions and credits, and they can help you keep more of the money you earn. Let’s learn about how they work and what you can claim to get the biggest refund possible!
What Are Tax Deductions?
Tax deductions are like discounts for your taxes. They lower the amount of money the government says you made. For example, if you earned $1,000 but had a $200 deduction, it’s like you only earned $800. This means you pay less in taxes!
1
Charity Donations
If you donate $500 to a qualified charity or give away old clothes and furniture to a charitable organization, you can deduct the value of those donations from your taxable income.
2
Home Mortgage Interest and Property Taxes (SALT)
If you pay $10,000 in mortgage interest and $3,000 in state and local property taxes, you can deduct both, reducing your taxable income. Note that the total deduction for state and local taxes is capped at $10,000.
3
Student Loan Interest
If you paid $1,200 in interest on a qualified student loan, you can deduct this amount from your taxable income, even if you don’t itemize deductions.
4
Medical Expenses and Health Savings Account (HSA) Contributions
If you contribute $3,000 to an HSA and have $10,000 in medical expenses that exceed a percentage of your income, you can deduct both the HSA contributions and a portion of the medical expenses.
5
Work-Related and Educator Expenses
If you’re a teacher who spends $500 on classroom supplies and also incurs $400 in unreimbursed work-related expenses, you can deduct up to $300 for educator expenses and potentially deduct a portion of the work-related expenses if you itemize.
6
IRA Contributions
If you contribute $6,000 to a traditional IRA (assuming you meet income requirements), you can deduct that amount from your taxable income, lowering your tax liability.
7
Moving Expenses
If you’re an active-duty military member and you move due to a new permanent station, you can deduct the costs of moving, like packing, shipping, and storage of household goods.
8
Home Office Deduction and Business Expense
Example: If you use 10% of your home for a home-based business and spend $3,000 on office supplies, you can deduct 10% of your home-related expenses (like rent or utilities) and the full amount of your business expenses from your business income.
9
Adoption Expenses
If you spend $8,000 on adoption-related expenses, you may be able to deduct a portion of those costs.
10
Mortgage Insurance Premiums
If you paid $1,500 in mortgage insurance premiums, you may be able to deduct those premiums, depending on your income level.
What Are Tax Credits?
Tax credits are even better than deductions because they directly lower the amount of tax you owe. If you owe $1,000 in taxes but have a $200 credit, you only have to pay $800. Some credits can even give you money back if you don’t owe any taxes!
1
Child Tax Credit
If you have two children under the age of 17, you could be eligible for a tax credit of up to $2,000 per child. If you owe $3,000 in taxes, the Child Tax Credit could reduce your tax bill to $1,000.
2
Earned Income Tax Credit (EITC)
A family with two children and an income of $40,000 could be eligible for an EITC of about $3,584. If the family owes $2,000 in taxes, the EITC could not only eliminate their tax liability but also give them a refund of $1,584.
3
American Opportunity Tax Credit (AOTC)
If a college student spends $4,000 on tuition, books, and supplies, they could be eligible for the AOTC, which provides a credit of up to $2,500. If the student (or their parents) owes $2,500 or more in taxes, this credit could reduce the tax bill by the full $2,500.
4
Lifetime Learning Credit (LLC)
A student enrolled in a course to improve job skills and spends $2,000 on tuition might qualify for the LLC, which provides a credit of 20% of the tuition cost, up to $2,000. This could result in a credit of $400 off their tax bill.
5
Child and Dependent Care Credit
If a family spends $4,000 on daycare for their two children while both parents work, they might qualify for the Child and Dependent Care Credit. The credit could cover up to 20% to 35% of the expenses, resulting in a credit of up to $1,400.
How to Maximize Your Refund
To get the biggest refund possible, it’s important to know all the deductions and credits you can claim. Keep track of things like donations, school expenses, and any money spent on improving your home. When it’s time to do taxes, you can use these to lower the amount of taxes your family owes or even get money back!
Remember, every little bit helps. By claiming the right deductions and credits, your family can save money and keep more of what they earn.
