We all want to lower our taxes, and while the IRS is not in the habit of giving out money for free, it does offer a number of tax breaks for filers of different circumstances. Thankfully, maximizing those tax breaks is often a simple matter of doing your research and knowing what to look for.
Key tax deductions
There are a number of deductions available to tax filers that, especially when combined, can amount to some pretty significant savings. Deductions work by excluding a portion of your income from taxes. A $1,000 deduction, for instance, means you won't pay taxes on $1,000 of earnings. If your effective tax rate is 25%, that will translate into $250 in tax savings.
With that in mind, here are some deductions you may be eligible for:
- Homeowner deductions, including your mortgage interest, property taxes, mortgage points, and PMI premiums -- though the PMI deduction phases out at higher income levels
- Traditional IRA contributions -- though your ability to take a deduction will depend on your income coupled with whether you have access (or a spouse has access) to an employer-sponsored retirement plan
- Charitable donations, including cash and non-cash contributions
- Medical expenses that exceed 10% of your adjusted gross income
- Moving expenses, provided you move for a job that increases your commute by 50 miles or more
- Job search costs that exceed 2% of your adjusted gross income -- though you can only claim this deduction if you're looking for work within your field and aren't a first-time job hunter
- Student loan interest -- though this deduction phases out at higher income levels
Money-saving tax credits
In addition to tax deductions, there are a number of credits available that can shave thousands off your tax bill. Unlike deductions, which simply exclude part of your earnings from taxes, tax credits serve as a dollar-for-dollar reduction of your tax liability. So while a $1,000 deduction will only save you $250 if you typically fall into the 25% tax bracket, a $1,000 credit will shave a full $1,000 off your tax bill.
As is the case with certain tax deductions, most of these credits aren't available to high earners. But if you're a low or middle-income household, it pays to see whether you qualify.
Here are some of the lucrative tax credits available:
- The Earned Income Tax Credit, which could be worth up to $6,318 depending on the number of qualifying children in your household
- The Child Tax Credit, which could be worth up to $1,000 per child under the age of 17 in your household
- The Child and Dependent Care Credit, which gives even higher earners who pay for child care a portion of their costs back
- The American Opportunity Tax Credit, which could be worth up to $2,500 per eligible student in your household who incurs higher education costs
- The Lifetime Learning Credit, which could be worth up to $2,000 per eligible student in your household who incurs higher education costs
- The Saver's Credit, which could be worth up to $2,000 per filer for contributing to a retirement savings account
Though most of these credits are non-refundable -- meaning the most they can do is reduce your tax liability to $0 -- the Earned Income Tax Credit is refundable. If you owe no tax but then apply the credit, you'll get a refund check for the difference.
Don't lose out
While reading up on credits and deductions can help you cover your bases, you're even less likely to miss out on a crucial tax break if you file your return electronically. Most of the tax software out there is designed to ask the right questions and help you arrive at the deductions and credits you're eligible for. Best of all, if you earn less than $64,000, you can file at no cost using the IRS Free File tool.
When you sit down to file your return this year, take the time to explore the numerous tax breaks out there. You may be surprised at how much you'll save.