Build yourself a big tax refund by taking advantage of tax credits and deductions. Photo: Got Credit.
It's true that there are lots of topics more fun to read and learn about than taxes, but most of them won't put money in your pocket. The savvier you get about tax matters, the more you save, as you learn about various deductions, credits, and smart tax moves. Below, for example, are some under-appreciated tax breaks that might save someone a total of $8,525 -- or more!
First, though, be sure you understand the difference between a tax deduction and a tax credit. A deduction lets you reduce your taxable income. Have taxable income of $50,000 and a $2,000 deduction? Your taxable income is now $48,000. If you're in the 25% tax bracket, you avoid being taxed on that $2,000 and save $500. If you have taxable income of $50,000 and a $2,000 tax credit, the credit reduces your tax dollar-for-dollar. It's worth a full $2,000.
Many people don't realize how much they can save with various tax breaks. Image: Pixabay
Lifetime Learning Credit -- save $2,000
There are several tax credits available to help with education costs. The American Opportunity Credit, for example, is worth up to $2,500 per eligible post-secondary student, and can only be claimed for up to four years. Meanwhile, the Lifetime Learning Credit, is worth up to $2,000, but it can, in theory, be used every year that you and your expenses qualify -- for postsecondary education and also for coursework designed to establish or improve job skills. The credit allows you to deduct 20% of up to $10,000 in qualifying expenses, which include tuition and fees -- but not books and course materials, unless you have to buy them directly from the school. Read up on this credit and the American Opportunity Credit, too, if you or others in your household are taking courses.
Student loan interest deduction -- save $625
Are you shouldering student loans and paying a lot (or even a little) in interest? Well, the IRS cuts you a break. If your modified adjusted gross income ("MAGI") is below $80,000 (or $160,000 if you're married and filing jointly), you may be able to deduct up to $2,500 for interest payments made on loans for higher education. If you're in the 25% tax bracket, that can be worth $625 to you.
Image: Darien Library, Flickr.
Moving expense deduction -- save $1,400 or more
If you're moving in order to take a new job or because your job's location has changed, you might want to look up IRS Form 3903, because you may be able to use it to deduct many moving expenses. There are rules to learn, of course, such as the requirement that your new commute must be at least 50 miles longer than your old one and the fact that you can't deduct expenses that your employer reimbursed you for.
Qualifying expenses include the cost of packing and moving your belongings (including in-transit storage and storage costs related to a foreign move), tolls, and lodging expenses. The cost of gas and/or oil used for the trip also qualifies, though you might also just use the mileage reimbursement rate that was recently $0.19 per mile. (Remember to keep receipts!) Expenses that don't qualify include meals, side-trips for site-seeing, travel expenses related to trips for job-hunting and interviewing, expenses related to buying or selling your home, and the like. If you racked up $5,000 in qualifying expenses on your move and you're in the 28% tax bracket, you could save $1,400.
Child and Dependent Care Credit -- save $3,000 or more
If you're spending money on care for a child or other dependent (such as parent or even a sick spouse) while you work or seek work, you may qualify for the Child and Dependent Care Credit. It offers a credit of up to $3,000 for the care of one eligible dependent and up to $6,000, total, for two or more. The size of the credit allowed depends on your adjusted gross income. The more you make, the smaller your credit. But for those of somewhat more limited means, this can be a huge help. Netting $3,000 is like receiving $250 per month in assistance for your dependent care costs. You can learn more in IRS Publication 503, Child and Dependent Care Expenses.
A deduction reduces your taxable income -- and thus your taxes. Image: StockMonkeys.com.
Health insurance premiums deduction -- save $1,500 or more
If you're self-employed, you pay more in taxes in some ways, but you also get some special tax breaks. For example, while regular office workers typically only pay some of their health insurance costs, self-employed people pay for all of theirs -- but they can often deduct that expense, too.
If you're self-employed and not covered by any employer-provided plan (such as for a different job you hold or through your spouse's employer), then you can deduct all of your health insurance premium costs. If you're paying $500 per month, that comes to $6,000 per year. Deduct that when you're in the 25% tax bracket, and you can save $1,500.
