Are you overpaying your taxes? Yup – it’s a possibility, especially if you tend to overlook the most common tax deductions.
It’s high time to keep more money in your wallet, and it has to start by skipping the shorter route when filing for your taxes. If you do, there’s always a strong possibility of getting shortchanged.
Your age matters. Take note that people 65 years old and older are eligible for a higher standard deduction. It also applies to people who are blind.
What is a Tax Deduction, Anyway?
These deductions can be big money savers if you know how to spot and apply them.
A tax deduction makes your taxable income lower. This is done by subtracting the tax deduction amount from your salary. When computed and applied correctly, the tax deduction lowers your tax liability.
So what are you waiting for? This is a good kick start towards financial progress.
Check the following and see if you can apply any of the common tax deductions in the list the next time you file for your tax:
- Student Loan Interest
This kind of deduction can save you as much as $550. First of all, this is not an itemized deduction. If qualified, you can take both the standard deduction and student loan interest deduction.
For you to save money, your taxable income must already be free from your student loan interest. The amount you will save in the process depends on your tax bracket. For example, you will get around $550 if you are in the 22 percent tax bracket.
The deduction is a tax break for the parents and college students who applied for student loans.
If filing jointly, you can apply for the deduction if your MAGI or modified adjusted gross income is lower than $170,000. This can be used for private and federal student loans acquired through the following:
- You were obligated to repay the loan.
- You used your name to make a loan that somebody else used.
- You are a graduate student who continues making loan payments while studying.
- The loan was utilized for necessary education expenses, such as books, room and board, and tuition.
- Medical Expenses
Make sure to keep the receipts you and your dependents got from costly medical expenses, including dental needs and hospitalization.
For 2021-filed tax returns, you can deduct qualified expenses under this category as long as they are 7.5 percent higher than your adjusted gross income the year before. Here are some of the qualified medical expenses for this kind of tax deduction:
- Insurance premiums for long term or medical care you paid from your own money after taxes or your employers failed to pay
- Cost of transportation incurred from going to and from the medical facility
- Service animals, crutches, hearing aids, dentures, wheelchairs, and reading or prescription glasses
- Prescription drugs and insulin
- Weight loss programs prescribed by a doctor as part of treatment or rehabilitation
- Nursing home and hospital care
- Payments made to medical practitioners, including surgeons, dentists, doctors, psychologists, psychiatrists, and chiropractors
You can learn more about this and get a detailed list at the IRS Publication 502.
- Child Tax Credit
Before planning on having more children to get higher deductions, you must understand that it applies to people whose modified adjusted gross income is:
- $150,000 if married (filing jointly)
- $112,500 if the head of household
- $75,000 if single
If you don’t usually file a tax return, which mostly happens to low-income families, you can head over to the IRS site. You need to register for the advance child tax credit payments per month using the non-filers sign-up tool of the IRS.
As of 2021, the tax deductions you can get using the child tax credit are as follow:
- $300 per month for every eligible dependent child aged six and below by the last day of 2021
- $250 per month for every eligible dependent child aged 17 and below by the last day of 2021.
Claiming Your Tax Deductions
To claim tax deductions, you can either itemize deductions or have a standard deduction. You can only apply for one type but not both.
How do you itemize tax deductions?
The idea here is to aim for a lower taxable income by applying tax deductions you are qualified for. So you have to sort through the list and apply all the applicable deductions to have lower taxable income.
How do you apply for a standard deduction?
As of 2020-2021, this is a straightforward tax deduction with no questions asked. Your filing status will determine the total amount of your adjusted gross income.
Here’s a look at the filing status and amount of deduction you can get in 2020 and 2021:
- Head of household – $18,800 (2021) and $18,650 (2020)
- Married (filing separately) – $12,550 (2021) and $12,400 (2020)
- Married (filing jointly) – $25,100 (2021) and $24,800 (2020)
- Single – $12,550 (2021) and $12,400 (2020)
So what do you choose?
Any of the two will do – lower your taxes, of course, as long as you have familiarized yourself with the common tax deductions.
However, many people who have resorted to itemizing find the standard deduction as a better option. Standard deduction has gone up as seen in the list of the filing status and amount of deduction for the years 2020 and 2021. This has been the trend for many years in the past.
You can also take into consideration the following points:
- Suppose your itemized deductions’ sum is lower than your standard deduction. In that case, you might as well file for a standard deduction to gain more.
- If your itemized deductions’ sum is higher than your standard deduction, you might be better off itemizing your deductions. But there’s a catch. This process is tasking. It requires you to fill up more forms and show proof that you are qualified for the deductions you’re applying for.
So the next time you file for your income tax, make sure that you have included the applicable tax deductions. The lower your taxes, the more money you keep in your pocket – well, at least, before the bills start pouring in.