Taxes are an essential part of any functioning society. They fund essential services such as public education, healthcare, infrastructure, and defense, among others. While taxes are necessary, no one wants to pay more than they have to. The good news is that there are many tax deductions and credits available to help individuals and businesses lower their tax burden. In this article, we’ll explore some of the most common tax deductions and credits.
Tax Deductions
A tax deduction is an expense that can be subtracted from a taxpayer’s gross income to reduce their taxable income. Here are some of the most common tax deductions:
- Charitable donations: Taxpayers who make donations to qualified charitable organizations can deduct the amount of their donation from their taxable income. To claim this deduction, taxpayers must have a record of their donation, such as a receipt or bank statement.
- Home mortgage interest: Homeowners can deduct the interest paid on their home mortgage, up to a certain limit. The limit is $750,000 for mortgages taken out after December 15, 2017, and $1 million for mortgages taken out before that date.
- State and local taxes: Taxpayers can deduct their state and local income, sales, and property taxes up to a limit of $10,000.
- Medical expenses: Taxpayers can deduct medical expenses that exceed 7.5% of their adjusted gross income. These expenses can include doctor’s visits, prescription medications, and medical devices.
- Retirement contributions: Taxpayers can deduct contributions made to a traditional IRA or a 401(k) plan from their taxable income.
Tax Credits
A tax credit is a dollar-for-dollar reduction in the amount of taxes owed. Here are some of the most common tax credits:
- Child tax credit: This credit is available to taxpayers with children under the age of 17. The credit is worth up to $2,000 per child and is partially refundable.
- Earned income tax credit: This credit is available to low and moderate-income taxpayers. The amount of the credit is based on the taxpayer’s income and the number of children they have.
- Lifetime learning credit: This credit is available to taxpayers who are paying for education expenses. The credit is worth up to $2,000 per tax return.
- Retirement savings contribution credit: This credit is available to taxpayers who make contributions to a traditional IRA or a 401(k) plan. The credit is worth up to $1,000 for single taxpayers and up to $2,000 for married taxpayers.
- Energy tax credit: Taxpayers can claim a credit for certain energy-efficient improvements made to their home. These improvements can include new windows, doors, and insulation.
Conclusion
Tax deductions and credits can significantly reduce a taxpayer’s tax burden. However, it’s essential to keep in mind that not all deductions and credits are available to everyone. Some deductions and credits have income limits or other requirements that must be met before they can be claimed. Additionally, some deductions and credits may not be available every year, so it’s essential to stay up-to-date on current tax laws.
If you’re unsure which deductions and credits you’re eligible for, it may be helpful to consult with a tax professional. A tax professional can help you navigate the complex tax code and ensure that you’re taking advantage of all the deductions and credits available to you.