Tax deductions can help lower your tax bill and even increase your tax refund on your return. There are several tax deductions you might not know are deductible.
In some tax years and some states, it might make sense to itemize your deductions rather than take the standard deduction. For example, if you made a large purchase like a vehicle or engagement ring, you could deduct sales taxes off your federal return. Or, if you live in a state that does not impose a state income tax, you could write off the sales tax you paid that year.
You can deduct medical expenses that exceed 7.5% of your AGI if you itemize your deductions. You may even be able to deduct 100% of your health insurance premiums if you are self-employed. To qualify, you must have no other health insurance coverage and you may only deduct the amount of business income earned that year.
Home Office Deduction
Any space in your home used exclusively for conducting business can be deducted at $5 per square foot, up to 300 square feet.
Cash donations to approved charities can be deducted for up to 50% of your AGI but must be substantiated with bank statements or receipts. Non-cash donations can be deducted at fair market value. Even out-of-pocket expenses for charitable work can be deducted. Be sure to confirm that the charity has a tax-exempt status with the IRS before donating if you plan to claim a deduction. A few examples of approved organizations include a trust, foundation, church, synagogue, or other religious organizations, and veterans’ organizations.
Childcare & Dependent Care
If you pay a babysitter to watch your children while you work, look for work or attend school full-time, you may be able to claim the Child Care Credit. This can also apply to care for an elderly parent who lives with and is a dependent of the adult child.
Student Loan Interest
If you are required to repay student loan debt, you can deduct the interest paid, up to $2,500, on your federal return. In addition, if your parents paid your student loan debt, the IRS views that money as a gift to you used to pay the loan. In this case, you can deduct up to $2,500 of the student loan interest they paid, as long as they do not claim you as a dependent on their tax return.
The number of deductions related to college is quite large. You can deduct up to $4,000 of eligible tuition. The Lifetime Learning Credit is worth up to $2,000 per year and can be claimed for education expenses to help gain or improve skills. The American Opportunity Tax Credit allows a maximum annual credit of $2,500 for qualified education expenses paid in the first four years of higher education. Some states even allow you to deduct contributions made to your 529 College Savings Plan.
Tax Relief for Taxpayers
Every tax situation is different. There are countless deductions and credits taxpayers can claim on their federal or state returns. The best thing to do is speak with a tax preparer about which deductions and credits you are eligible for and what substantiation might be needed to claim them. Remember claiming deductions without proper substantiation can lead to audits and delays in processing your return. If you need tax help, give Optima a call at 800-536-0734 for a free consultation with one of our knowledgeable agents.