Key Points:
- Knowing your tax benefits can significantly increase your tax refund, making it important to educate yourself or consult a tax professional.
- Two ways to file tax returns are the standard deduction and itemized deduction, each with its own set of eligibility criteria and potential advantages.
- Common tax benefits include deductions for medical and dental expenses, student loan interest, and contributions to retirement accounts like 401(k)s.
- Homeowners can also benefit from mortgage interest deductions, which can substantially reduce taxable income.
- Energy-efficient home improvements qualify for Energy-Saving Tax Credits, offering an incentive for eco-friendly initiatives.
If there is one investment that guarantees real-time saving, it is going to be the time you spend going through your expenses for the past year and working out a way to maximize various tax reductions. Of course these are all within legal limits and ultimately mean a bigger check from the IRS as your tax refund.
Simply put, tax benefits, or tax deduction adjusts your taxable income into a lower bracket, once you have accounted for all expenses that the government has deemed as tax-friendly and saves you from being taxed at a higher rate. It is a worthwhile idea to research and know more about the various benefits that are common knowledge as well as not so commonly known when you sit down to do your taxes. If you have some money to spare, you can always pay a tax consultant for filing in your taxes. However, at the end of the day if your refund comes to little or less than what you have paid the consultant, it would be a lost cause. Familiarizing yourself with tax benefits and investment strategies is going to help you in the long run. For one thing, you will save up on the consultant's fee, and secondly, as you gain more experience and confidence each year, you will be able to maximize your tax refunds. Consider these your savings from the year past. The IRS takes three weeks after it has received your tax return to process and issue you a refund.
There are two ways to file in your tax return, the standard deduction or the itemized deduction. Getting to know the parameters of eligibility for both, and filing according to the method that adds up to greater tax refunds is a skill that will serve you for many years. Get to know more about these two methods and criteria here. (Add link to methods of tax deduction article here.)
The most common of tax benefits, as credits or deductibles, also acknowledged by the IRS, include:
Medical and Dental Expenses: One of the most commonly known tax benefit is from medical and dental care expenses. Keep in mind that these are expenses that can be claimed as deductibles only if prescribed by a doctor or dentist, these can be medical and dental procedures as well as medication costs. The criterion for claiming these is that the total of these costs should exceed 10 percent of your adjusted gross income (AGI). These are listed as itemized deductions as per the IRS and include, “include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the body.” (Source: http://www.irs.gov/taxtopics/tc502.html)
If you have had to travel to seek medical help, or had a companion to see you through this time, you can itemize these expenses as well to seek exemption on the expenses. This is an often over-looked tax benefit that is listed on the IRS website as well.
Health and dental insurance premiums, if facilitated by the employer, are usually not listed as part of your income and as such, not subject to taxation. If you are unemployed or self-employed however, or your company does not offer health insurance in the contract, you can itemize the insurance premium as a deductible when filing your returns.
Asides prescription drugs, contact lenses, eye glasses, hearing aids, and for new parents, even the costs of nursing equipment can be itemized as deductible.
Student Loans: Some respite for recent graduates who start their practical lives with the added stress of loans from their academic pursuits, interest on student loans, both federal and private can qualify as a deductible for tax filing purposes. It does have some limits though. For starters, a borrower can only claim up to 2500 USD as deductible in interest accrued on student loans acquired for higher education, or the amount of interest actually paid on the loan. According to the IRS, this deduction is claimed as an adjustment to income, so there is no need to itemize it. This tax benefit however does have income limitations, as a single filer, your AGI should be between 60,000 to 75,000 USD, couples filing joint taxes should have AGI between 120,000 and 150,000 USD. For the year 2013, you can only claim interest on student loans as deductibles for the first five years of repayment. Typically your lender is supposed to provide you with Form 1098-E, the Student Loan Interest Statement if you have paid more than 600 USD in interest.
Save for Retirement: The government seeks to encourage more people to save for their old age, individual retirement account, or 401 (k) is a great way to start saving up for your retirement. Your contributions in the 401 (k) qualifies as a tax credit, instead of a deductible. (Read more on deductibles and credits here, insert link to article)
How much you get in tax credits as Retirement Savings Contributions Credit is again dependent on your AGI. The system encourages those in the lower income strata to save more. For the year 2011, for instance, a single, widowed or married separate filer could get up to 50% credit rate for an income limit of 17,000 USD, for married joint filers, the limit was 34,000 USD and for head of household filer, the income limit was 25,000 USD.
Home Mortgages: One of the most commonly known and claimed deductions is on home mortgages. It was feared of being repealed in 2012, but for now, home owners can sigh in relief, in fact the Congress has extended the deduction to private mortgage insurance (PMI). (Read more about home mortgages here)
Basically this deduction enables homeowners to claim interest accrued on the mortgage they took out to buy a house, as a deduction from their total taxable income. The deduction is a remnant from old times when the government wanted to promote familial stability and favored home owners by giving them this relief. In the past few years, it has come under tremendous fire since it is reported to benefit those in the higher income brackets more than those in the lower income groups.
Going Green: Whether you install solar panels in your home, or opt for energy-efficient HVAC, you can qualify for Energy-Saving Tax Credits for your efforts. Keep in mind that these can be claimed in one year and not the one following it, even if you do carry out more ‘green' changes in your lodgings. According to EnergyStar, you can claim up to 10% of cost, up to 500 USD in existing home or principal residence if you have installed energy efficient biomass stoves, HVAC, insulation, new roofing, non-solar water heaters and/or, windows and doors. New constructions and rentals do not qualify for these credits.
Newly constructed as well as existing homes can also qualify for up to 30% of total cost in tax credits if they install any of these categories: geothermal heat pumps, small wind turbines for residential use, and solar energy systems. You may have to invest one time in carrying out the changes, but in the long run, you do yourself and the environment a favor, while the IRS also acknowledges your efforts as tax credits.
