Introduction
Tax planning is an important part of smart personal finance management. Understanding the various forms of deductions and the best ways to take advantage of them can save you money and lead to a lower tax bill. Knowing the ins and outs of the tax code, it’s possible to maximize your deductions and minimize your taxes. This article will discuss some of the most common and least-used tax deductions you might be overlooking.
Business Expenses
If you're self-employed or own a business, you're likely eligible for workplace-related deductions such as office supplies, travel expenses, and meals, drinks, and entertainment. Business use of your car including insurance, maintenance, and fuel costs is also deductible.
All of these expenses must be directly related and “ordinary and necessary” expenses in order to be tax deductible. You'll want to keep all receipts for any of these expenses in case of an audit. Additionally, you may be able to deduct the costs of repairing and replacing equipment and fixtures, as well as home office expenses if you do work from home.
Retirement Account Contributions
Making intentional and regular contributions to a retirement account, such as a 401(k) or traditional IRA, is a great way to reduce your taxable income while also saving money for the future. Any contributions you make to these accounts can be deducted from your taxable income.
Additionally, self-employed individuals can contribute to a SEP IRA which offers some of the same benefits as a traditional IRA or 401(k). The exact amount you can contribute depends on your financial situation, but the important thing is to keep contributing as much as you can, as regularly as you can.
Medical Expenses
You may be able to deduct medical expenses if the total amount of your out-of-pocket health and medical expenses exceeds 7.5 percent of your adjusted gross income. Keep in mind that the medical expenses must have happened within a year of the date you're filing taxes and must have been documented with receipts as proof.
Common medical expenses that may be eligible for deduction include: medical copayments, doctor visits, dentist visits, vision care, medications, medical supplies, and medical equipment. Qualifying health and medical expenses also include some nonmedical expenses such as weight-loss programs for medical reasons, mental health treatment and other preventive health care.
Educator Expenses
If you’re a qualified educator who purchased educational supplies for use in their teaching, you may be eligible for a $250 deduction. Qualifying expenses include books, supplies, equipment, and other materials used for classroom teaching.
Charitable Donations
Charitable donations can also be tax deductible and there are several different types of donations that may qualify. These include cash, services, tangible personal property, and goods as long as they were given to qualified organizations. However, it’s important to keep all documents related to these donations in case they’re needed during an audit.
The amount of money that can be deducted depends on the type of property donated. Cash donations are usually limited to 50% of the donor’s adjusted gross income, while donations of tangible personal property can't usually exceed 30% of the donor’s adjusted gross income.
Student Loan Interest
If you're a student or recent graduate, you may be eligible to deduct up to $2,500 in interest paid on student loans. The deduction is “above the line” meaning that it reduces adjusted gross income, which is important for retirees who are subject to income restrictions.
To claim this deduction, you must meet certain eligibility requirements such as having paid interest in the tax year, being legally obligated to pay the interest, and not being claimed as a dependent on someone else’s tax return.
Energy Efficiency Improvements
If you've made energy-efficient improvements to your home, such as installing a new HVAC system or solar panels, you may be eligible for a tax credit. It should be noted that these are credits and not deductions, which means they’re subtracted directly from the amount of taxes you owe.
The exact amount of the credit will depend on the type of energy-efficient improvement and the energy-efficiency rating of the item in question. Doing research on the energy-efficiency of the items you’re purchasing can help you maximize the benefit of the tax credit.
Conclusion
Tax planning is an important part of smart personal finance management. Knowing the ins and outs of the tax code and taking advantage of deductions can help you save money and lower your tax bill. This article has outlined some of the most common and least-used tax deductions you might be overlooking. Utilizing these deductions can result in significant savings and help you keep more of your hard-earned money.