Tips for Tax Deduction & Credit Planning
About the author: Chris Abts is the President & founder of Cornerstone based in Reno, NV. He helps people to better manage their wealth so they can focus more of their time on what truly brings meaning and fulfillment to their life. Abts is also a best-selling author and TV show host of Redefining Retirement, which airs every Sunday evening at 5:30pm on KTVN Channel 2.
Tax season is upon us, with the federal filing deadline approaching on Tuesday, April 18. As you prepare to file your taxes, we want to help you make the most of your available credits and deductions. After all, every dollar you do not spend on taxes is one you can potentially invest toward your financial future. It is important to understand what tax credits you may be eligible for that will directly reduce your tax payments, and possibly even result in a refund. The IRS offers two kinds of credits: refundable and nonrefundable. With refundable credits, you can receive a refund, even if you owe less than the credit amount. On the other hand, nonrefundable credits offer a refund amount up to your tax liability.
Below is a list of common tax credits you could qualify for pulled from the IRS website:
Earned-Income Tax Credit: For households with low to moderate income. The income limits can fluctuate, and many more people qualify for this credit than may realize it. A recent Turbo Tax article shared how 25% of eligible taxpayers do not claim this credit - which can be over $6,000 per household.
Child and Dependent Care Credit: For households who pay for childcare. If you have dependent children and pay for childcare, you may qualify for credits up to $6,000, depending on your adjusted gross income (AGI).
Credit for the Elderly or Disabled: For taxpayers 65 and older, or those on permanent disability who meet income requirements. This credit starts at $3,750 and goes as high as $7,500. So, if you fit the age or disability restrictions, researching your eligibility is well worth the effort.
Lifetime Learning Credit: For households paying for education. This credit can provide you up to $2,000 toward qualified tuition and enrollment fees. To be eligible, you must have a modified AGI less than $130,000 as a married couple or $65,000 as an individual.
Premium Tax Credit: For households that purchased health insurance through a federal or state marketplace. This credit helps people cover the cost of premiums for insurance they purchase through the Health Insurance Marketplace. Depending on your income and other personal details, you may be able to receive a premium tax credit if you, your spouse, or your dependent purchased an eligible health insurance plan.
Planning Your Deductions
Deductions help reduce your taxable income, thereby hopefully lowering your tax liabilities. Between itemized and standard deductions, taxpayers claimed nearly $2 trillion in the most recently tracked year, according to a recent article from Turbotax. That's a lot of money! But, chances are, many people miss eligible deductions and still incur more in taxes than they need to pay.
Remember, when you use the standard deduction, you can likely claim a higher deduction if you or your spouse has a qualifying vision impairment or a birthday on or before January 2, 1952.
If you itemize your deductions, you are likely familiar with the opportunities to write off your home mortgage interest, tuition fees, and charitable contributions. But here are a few more deductions you may be eligible to take, depending on your circumstances also pulled from the IRS website:
State Sales Tax: Mostly for households who don't pay state or local income tax. If you only pay federal income taxes, you may be able to deduct your state sales tax on your federal return. This deduction is especially helpful if you made a large, taxable purchase in 2016, such as a car.
Business Travel Expenses: For taxpayers who have unreimbursed work travel. If you paid for travel to conferences, meetings, or other work obligations, you may be able to deduct your expenses. The list of potentially deductible items goes beyond transportation and lodging to include dry cleaning, meals, business calls, and more.
Student Loan Interest: For households paying student loan debt. If you currently pay student loan debt, you may be able to deduct interest, depending on your income and specific circumstances. Deductions can be up to $2,500 for student loan interest - and you are allowed to claim this deduction even if you don't itemize deductions on your tax return.
Sale of Your Home: For households who profited from selling their main home in 2016. If you sold your primary residence last year and earned a profit, you may qualify to claim this exclusion. If you qualify, you can exclude up to $250,000 of the gain from your income - or up to $500,000 if you file taxes jointly with your spouse.
Because the opportunities to reduce your tax liabilities are vast, and these credits and deductions are only the beginning, it is best to consult with your tax preparer or a qualified tax professional. Various factors in your unique financial life will guide what options are available to you.