Nobody likes paying taxes, but everyone likes being able to reduce the taxes they have to pay. There are several ways you can get a few tax breaks, whether it’s a tax deduction, tax credit or tax exemption. Even if you already utilize a few, you may still be asking yourself if you’re taking full advantage of what’s available. When you prepare your tax return, are there any tax breaks or secrets that you might be missing? The following article will discuss a few tax breaks available to almost anyone that you could be missing out on.
Common Tax Breaks
Two of the most common tax breaks are deductions and credits. A tax deduction reduces the amount of income that is taxable while a tax credit actually reduces your tax obligation dollar for dollar. To see the different effect each has on taxes paid, we’ll look at a hypothetical.
Let’s say you have $50,000 in taxable income and are in a 20% tax bracket. With a $1,000 tax deduction, what you pay in taxes is reduced from $10,000 to $9,800. With a $1,000 tax credit, you only pay $9,000 in taxes. All else being equal, tax credits are nicer than tax deductions.
Tax Break #1: State and Local Sales Taxes
You are allowed to deduct either state and local sales taxes or state and local income taxes. Generally, taking the state and local income tax deduction will be most beneficial, but if you bought an expensive car, boat or piece of jewelry, it might be better to take the state and local sales tax deduction instead.
Tax Break #2: Charitable Out-of-Pocket Expenses
You probably already knew those donated items or the tithe you’ve been paying was tax deductible. But did you know the out-of-pocket costs you incurred when you donated a few weekends at the church or soup kitchen might be as well?
Tax Break #3: Education Costs
Through the American Opportunity Tax Credit, you can get a tax credit for the first four years of post-secondary education costs, such as tuition and books. Taxpayers receive a dollar-for-dollar tax credit on the first $2,000 and 25% on the next $2,000.
Tax Break #4: Jury Duty Pay
If your employer paid you your normal compensation while you had jury duty, they probably wanted you to pay them whatever jury duty pay you received from the court. If this occurs, you can claim the jury duty money you gave your employer as a tax deduction.
Tax Break #5: Professional Dues
Many professionals pay annual fees to work related organizations. As long as membership in these professional organizations is work related, then the membership dues are probably tax deductible.
Tax Break #6: Care for a Child or other Dependent
Taxpayers can receive a tax credit for the cost of caring for a child or disabled dependent as long as the costs were incurred in order to work or look for work. The amount of the credit ranges between 20% and 35% of qualified expenses. The exact percentage depends on your adjustable gross income.
Tax Break #7: Alimony
Alimony payments made pursuant to a divorce agreement are tax deductible for the person making the alimony payments. Child support payments or payments made as a part of property distribution are not tax deductible, however.
Tax Break #8: Earned Income Tax Credit
The earned income tax credit (EITC) is a tax credit that is based on several factors such as the taxpayer’s income, whether they have a spouse and the number of children, if any. The EITC is targeted to those who are from lower-income households. However, about one in four of those who are eligible for the EITC fail to claim it.
A Final Common Sense Tip
Many of these tax breaks are subject to certain exceptions, requirements and other limitations. Before applying these tax deductions and credits in the preparation of your tax return, it may be advisable to consult with a tax professional, such as a CPA.