To comprehend taxes in the US one needs to have a basic understanding of the US tax system which can be complicated for a non-US citizen. In an effort to reduce some of the mystique associated with taxes, let us look at some of the most frequently claimed deductions and credits that can significantly reduce your taxes. Understanding them can assist in lowering the debt and possibly raise the refund.
Most taxpayers are not very well-informed on the various deductions and credits that they are allowed to claim. Thus, knowing the benefits you are eligible for, you can make wiser decisions and perhaps save a considerable amount of money.
Common deductions to be aware of
These are the allowances that can be made on the taxable income and are allowed to directly reduce the tax to be paid to the federal government. These are deductions that can greatly reduce the tax that you pay within a given financial year.
The most frequent deduction is the one related to mortgage interest, which allows a taxpayer to claim a deduction of the interest paid on a mortgage of up to $750,000. This can lead to significant reduction of the amount of tax paid, especially in the case of those with new mortgages.
Another significant exclusion includes the medical expenses, which enables the taxpayer to claim any amount he spends on medical expenses that exceed 7. It is 5% of their adjusted gross income. This can comprise things like operations, drugs, as well as some forms of assisted care expenses.
Interest and education deductions
Besides, the mortgage interest, one is also able to claim the interest on student loans. This applies to up to $2,500 of student loan interest per year which can be very helpful for people paying off their student loans.
The Tuition and Fees Deduction is another exciting option that can be useful for those who are going back to school. Although it is not a long term provision of the tax code, when in existence, it enables taxpayers to claim up to $4,000 in education costs. These deductions can help in lowering the costs of pursuing higher education and also in cutting down the costs of having to attend skill improving classes.
Charitable contributions
One can also donate to charitable organizations and this too is subtracted from the total income that is subjected to tax. This encompasses cash and check donations as well as the value of other items and services that are contributed.
It is required for the donations to be made to accredited charities and to have proper records for the donations that are going to be claimed. This way, the IRS compliance is maintained. Not only does this help you paid less in taxes but it also helps many causes and people in need. It is mutually beneficial to the donor and the intended recipient organization.
Key tax credits to utilize
While deductions takes off some portion of the income from being taxed, credits on the other hand, take off the actual tax amount that is due. Some credits, in fact, are refundable and that means you can get more refund than the tax you paid.
The Earned Income Tax Credit (EITC) is one of the most widely recognized refundable credits targeted to help low to middle-income working taxpayers. The amount of the EITC that a taxpayer can claim depends on the taxpayer’s income and the number of qualified children that the taxpayer has.
For education expenses, AOTC is very helpful. It offers scholarship of up to $2,500 per student in the first four years of post-secondary learning institutions. This credit is partially refundable which can help students with low tax liability even more.
Child and dependent care credit
The Child and Dependent Care Credit is another important credit that is very vital to working parents. This credit provides financial assistance for a part of the expenses in child care or in the support of a disabled dependent during working or job seeking hours of the parents.
This credit is also available depending on the percentage of eligible expenses, but there is a limit on the amount defined by the IRS. Childcare is expensive and through this initiative the government seeks to reduce the costs and enable parents to continue working.
Energy efficiency credits
There are also incentives for energy conservation of your house and you can also get credits for this. For instance, the Residential Energy Efficient Property Credit covers a certain amount of the expenses incurred in putting up renewable energy products such as solar panels.
Not only does it help you save money on utility bills, but also can help you get a nice tax credit. This encourages positive changes towards the environment in terms of improvements and investments. It is crucial to retain the records of the upgrades and certifications of the property’s energy efficiency to enable the accurate claiming of these credits on the tax return.
