Tax Deductions: What Are Popular Tax Deductions and Credits?

IIf you understand what they are, how they work and how to apply them, tax triggers and tax credits can save you a lot of money.

Your taxable income will be reduced by a tax deduction that reduces your total amount tax burden. Your taxable income is reduced by deducting the tax deduction from your income. Your tax liability decreases when your taxable income decreases.

A tax credit lowers your actual tax liability dollar for dollar. Some credits are refundable. So if your tax liability is $250 but you are entitled to a $1,000 credit, you will receive a check for the $750 shortfall.

A tax credit has the potential to reduce your tax liability significantly more than a tax deduction, as the simplified example in the table shows.

Several credits and deductions are available. Here’s a drop-down list of some typical ones, along with links to our other articles so you can learn more.

child allowance

This can earn you up to $2,000 per child for the 2022 tax year, with a potential refund of $1,500 of the credit.

Child and care allowance

For a spouse or parent who is unable to support themselves, a child under 13 or another dependent, a portion of the cost of childcare and related expenses during your working hours should be paid. Typically, it’s up to 35% of total expenses of $3,000 for a single dependent or $6,000 for two or more.

American Opportunity Tax Credit

This allows you to deduct the entire first $2,000 you spend on tuition, books, equipment, and school fees, plus 25% of the next $2,000, for a total deduction of $2,500. However, living expenses and travel expenses are not eligible.

Lifetime learning credit

For a maximum of $2,000, you can deduct 20% of the first $10,000 spent on tuition and fees. The Lifelong Learning Credit does not consider living expenses or transportation costs as eligible expenses, as does the American Opportunity Tax Credit. Books or other aids required for the study achievements can be claimed.

Interest deduction for student loans

If you paid interest on your student loans, you can deduct up to $2,500 from your taxable income.

adoption credit

This item pays up to $14,890 in adoption expenses for each child for tax year 2022. If you reach a modified adjusted gross income of $263,410 or more, the benefit will fully phase out and begin to decline gradually at certain income levels.

Deduction for charitable donations

If you provide details, you may be able to deduct the value of your charitable contributions from your taxable income, whether they are in cash or in kind, such as clothing or a car. Typically, according to the IRS, you can deduct up to 60% of your adjusted gross income.

Deduction of medical expenses

In general, reimbursable non-reimbursable medical expenses that exceed 7.5% of your adjusted gross income for the tax year are deductible.

Deduction for state and local taxes

For a combination of property taxes plus state and local income taxes or sales tax, you are allowed to deduct up to $10,000 ($5,000 if you are married and filing separately).

Deduction of mortgage interest

The mortgage interest tax deduction is being promoted as a means of reducing home ownership costs. It lowers the amount of federal income tax that eligible homeowners must pay by deducting the amount of mortgage interest from their taxable income.

Game Loss Deduction

For losses and expenses related to gambling, only the amount of the game winnings is deductible. Therefore, the purchase of $100 lottery tickets is not deductible unless you also win and report $100. More deductions than you win are forbidden.

IRA Contribution Deduction

You may be eligible to deduct contributions to a traditional IRA, but the amount you can deduct depends on your income and whether you or your spouse is covered by a company pension plan.

401(k) Contribution Deduction

What you transfer immediately from your paycheck to a 401(k) will not be taxed by the IRS(k). The maximum donation in 2022 is $20,500 ($27,000 if you are 50 years of age or older). Although self-employed people are permitted to form their own 401(k)s, these retirement plans are typically employer-sponsored.

savings loan

This credit ranges from 10% to 50% of donations to IRA, 401(k), 403(b) or certain other retirement plans up to $2,000 ($4,000 if submitted jointly). The percentage varies depending on registration status and income.

Contribution deduction for health savings account

HSA contributions are tax-deductible, and withdrawals are also tax-free as long as they are used towards eligible medical expenses. If you only have high-deductible health insurance for the 2022 tax year, the individual contribution margin cap is $3,650. The contribution cap for families with high-deductible health plans is $7,300.

Deduction of self-employment costs

For freelancers, contractors, and other self-employed entrepreneurs, there are numerous worthwhile tax deductions.

Home office deduction

The IRS allows you to deduct associated rents, utilities, property taxes, repairs, maintenance, and other related expenses if you use a portion of your home frequently and solely for business activities.

Deduction of the educator’s costs

For the 2022 tax year, teachers and other qualified educators can write off up to $300 in courseware.

Loan for residential energy

This reduces the installation costs of solar systems, such as solar water heaters and solar collectors, by up to 30%.

Electric vehicle tax credit

For the 2022 tax year, eligibility for this non-refundable tax credit ranges from $2,500 to $7,500 and is based on the weight of the vehicle, the manufacturer and whether or not you own the car. The credit is significantly increased for tax year 2023 (taxes filed in 2024) and now also covers used vehicles.

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