Paying income taxes is the civic duty of all Americans, with the money helping to pay for national defense, highways, schools, and police departments, among other things.
While we’re happy to pay our fair share, no one wants to pay too much income tax. That’s where tax deductions and credits come into play.
U.S. Congress has written the tax code — all 4 million words of it — to allow individuals and businesses to claim certain deductions and credits to lower their tax burden.
Many of these deductions and credits are designed to help lower-income households, working parents, homeowners, and people paying for college.
There are dozens of deductions and credits available; the trick is figuring out whether you qualify for them.
The first step to maximize tax deductions and credits is to understand the difference between them.
A tax deduction is a qualified expense that lowers your taxable income.
If you donate money or goods to charity, for example, you can deduct the fair market value of those donations from your taxable income.
Other popular tax deductions include:
- Home mortgage interest
- State, local, and real estate taxes paid
- Out-of-pocket medical expenses
- Student loan interest
- Moving expenses related to a job
Educate yourself on the difference between the standard deduction and itemized deductions.
TaxAct calculates both the standard deduction and itemized deductions to tell you which is more advantageous.
A tax credit provides a lump sum dollar amount to qualifying taxpayers and directly lowers the amount of tax you pay.
The Child Tax Credit, for example, pays $1,000 for each qualifying child in the household. If you owe the IRS $3,000, but you qualify for $2,000 in tax credits, then you only pay the IRS $1,000.
Other popular tax credits include:
- Earned Income Tax Credit (EITC) for lower-income working families
- Child and Dependent Care Credit to reimburse working parents for child care costs
- American Opportunity Credit and Lifetime Learning Credit to help cover the cost of college
- Homeowner credits for energy-efficient improvements like solar panels and wind turbines
It’s a good idea to research all of the tax deductions and credits, so you can take advantage of what’s available to you. Plus, having a good idea of what’s available to you will help you know which records and receipts to keep during the tax year.
For instance, if you qualify for a higher-education credit, keep track of your tuition statements and receipts for books. If you have vehicle expenses for your business, keep a mileage log. And, if you pay for doctor’s visits or medications out of pocket, hold on to itemized receipts and explanations of benefits.
If you experienced a major life change, like having a baby, buying a home or moving for a new job, TaxAct Life Events will walk you through the tax implications of each. This will help ensure you maximize your taxes based on your situation.