Forget offshore bank accounts and complicated tax loopholes. The best way to reduce your tax burden is by simply being knowledgeable. Understanding the credits and deductions available to taxpayers is how you can become a master of tax-season savings. There are myriad ways to save on your taxes. Let's go over some of the deductions and credits that count the most toward cutting your taxes legally.
Education can be one of the most expensive yet fulfilling endeavors. The IRS recognizes this and provides two tax credits to offset the cost of education: the American Opportunity Tax Credit, or AOTC, and the Lifetime Learning Credit. Students can claim the AOTC for the first four years of post-secondary education. The maximum credit is $2,500 per year for tuition, textbooks, and other school-related expenses. Students with incomes up to $80,000 are typically eligible. While you may be beyond your college years, you might qualify for the AOTC if you claim college-aged students as dependents.
The Lifetime Learning Credit provides up to $2,000 for qualifying education expenses for people with individual incomes of up to $63,000 or married couples with income of up to $127,000. There is no limit on the number of years a student can claim the Lifetime Learning Credit.
It's important to start saving for retirement as soon as you can. Not only will it help ensure a comfortable retirement, but it can get you some favorable tax treatment along the way. For example, the Savers Credit gives single filers earning up to $29,500 as much as $1,000 for eligible contributions to an IRA, 401(k), or certain other retirement plans. Married-filing-jointly taxpayers can get a credit of up to $2,000 if their income totals no more than $59,000. You cannot claim this credit if you are under 18 years old or a full-time student .
Health insurance is one of Americans' biggest expenses. The Health Coverage Tax Credit (HCTC) aims to help taxpayers with their insurance premiums, making coverage more affordable. This credit pays for 72.5% of qualified health premiums for people who meet the requirements and are enrolled in a qualified health plan. People who receive Trade Adjustment Assistance or a similar alternative, Pension Benefit Guaranty Corporation payees over 55, and qualified family members of people in either of the first two categories are eligible for the HCTC. Taxpayers enrolled in Medicare, Medicaid, and the Federal Employees Health Benefits Program are not eligible.
Individuals can deduct a number of business expenses and can even make deductions for money spent looking for work. The IRS states that, to deduct a business expense, it must be both "ordinary and necessary." That is, the expense must be one that is common to the industry and is appropriate and helpful to conducting business. For example, if you use a car for your business, you can deduct the cost of the car and some repairs. Many people use a home office, which can also be used as a deduction. In order to deduct a home office, it must be exclusively and regularly used for business and should be your principal place of business.
Most people know about charitable donations, as they are a favored year-end tactic among taxpayers looking to lower their tax burden. Taxpayers can deduct donations of both money or property -- so those donations to Good Will count, too -- made to qualifying organizations. If you donate property other than cash, you calculate the deduction based on its fair market value. Adjustments can be made for property that has appreciated in value. Cash contributions to charitable organizations can be deducted up to 50% of adjusted gross income. However, contributions to certain organizations are limited to a 30% deduction, so double-check before finalizing your tax return.
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