Tax deductions and credits reduce the amount you owe the government, possibly resulting in a larger tax refund or a smaller tax bill. You don't want to leave any money on the table, and careful planning combined with studying up on deductions and credits can help you file your taxes in the most optimal way.
Most people know that contributions to tax-deferred retirement accounts or a health savings account (HSA) will reduce your taxable income for the year, but these aren't the only ways to boost your refund or reduce your tax bill. Here's a look at five tax deductions and credits you don't want to miss if you're eligible.
1. Charitable gifts
If you donated money or goods to a qualified tax-exempt organization, like a church, volunteer fire department, or an organization with 501(c)(3) status, you can write off some or all of your donation on your tax return. In most cases, you can deduct charitable contributions up to 50% of your adjusted gross income (AGI), which is all the income you earned during the year, minus deductions, like tax-deferred retirement contributions, HSA contributions, and half of Social Security and Medicare taxes if you're self-employed.
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You may only deduct charitable contributions up to 30% of your AGI for certain organizations, like nonprofit cemeteries, some private foundations, and veterans organizations. Ask the organization if you're unsure whether it has a 30% or 50% limit.
Because it's a tax deduction, your donation will reduce your taxable income for the year. So if you have an AGI of $50,000 this year and you donated $1,000 to a qualified charity, this donation reduces your taxable income to $49,000. Your income tax rate will instead be levied on this amount.
Keep records of your transactions so you can prove you made the donation. This could be a bank or debit card statement or a canceled check. Get a written acknowledgement from the organization if you donate more than $250, and fill out Form 8283 for donated items, listing their fair market values. You don't need to submit this documentation with your taxes, but you'll need it should you get audited.
2. The Lifetime Learning Credit
People paying for undergraduate, graduate, or vocational education at a qualifying institution may be eligible for the Lifetime Learning Credit. This credit takes 20% off the first $10,000 you spend on education expenses like tuition and books, for a maximum credit of $2,000. This is a tax credit, not a deduction, so if you took the full credit, it would reduce your actual tax bill by $2,000, rather than shrinking your taxable income by that amount.
The catch is, single adults and heads of household only qualify if their modified adjusted gross income (MAGI) is below $57,000 in 2018. MAGI is your AGI with some of the deductions you qualified for added back in. You start with your AGI and add back your student loan interest, tax-deferred IRA contributions, higher-education costs, and other qualifying deductions to determine your MAGI. Taxpayers who have an MAGI between $57,000 and $67,000 may qualify for a reduced Lifetime Learning Credit. You can calculate this by filling out IRS Form 8863. Individuals with a MAGI over $67,000 in 2018 will not qualify for the Lifetime Learning Credit this year. Limits for married couples filing jointly are double the amounts listed above, and married couples filing separately cannot claim this credit.
3. Disaster recovery deduction
If your home was struck by a hurricane, wildfire, or other natural disaster for which federal aid was issued, you may be able to deduct uninsured costs associated with the disaster.
In order to calculate your deduction, you must first determine the fair market value for your home before the disaster -- this is usually the purchase price with adjustments for appreciation or depreciation -- and then subtract the current fair market value of the home. From this difference, subtract any money you received from your home insurer. Then, subtract $100, followed by subtracting 10% of your AGI.
So if you determine the loss was $10,000 after insurance, you would subtract $100, bringing you to $9,900, and from that, subtract 10% of your AGI. If your AGI is $50,000, you'd subtract $5,000, bringing your total casualty-loss deduction to $4,900, which is deducted from your total taxable income for the year.
4. Medical expenses deduction
You can deduct medical or dental expenses that exceeded 7.5% of your AGI in 2018. For the 2019 tax year, this limit rises to 10% of your AGI. There's no income restriction, so even high-income households can take advantage of this deduction as long as they meet the requirements. You will need proof of your medical costs and you must itemize your deductions when you file your taxes, rather than claiming the standard deduction.
Your health insurance premiums count toward your annual medical expenses, so don't forget to account for those. Self-employed individuals may be able to write off the cost of their health insurance premiums as a business expense, even if their medical costs don't exceed the thresholds listed above.
5. The Child and Dependent Care Credit
Working parents may be able to write off some of the costs of day care, nannies, and babysitters. If you have one child under 13, you may be eligible for a credit on the first $3,000 you paid in child care expenses. For two or more children under 13, this limit rises to the first $6,000 in child care costs. But you don't get to write off the full amount.
You can deduct between 20% and 35% of the first $3,000 or $6,000 you spent on child care costs, depending on your AGI. There is no income limit for this tax credit, but the percentage of child care expenses you can write off decreases as your income rises. IRS Publication 503 has a table to help you determine what percentage you can write off. If you use tax filing software, it should automatically determine how much of a credit you qualify for.
These are just a few of the many tax deductions and credits. Tax software may be able to help you determine which you qualify for, or you can contact a tax professional who can help you find all the deductions and credits you can take.
