Tax season is almost over. Have you filed your return yet, or are you still scrambling to beat the tax deadline for 2020? Don't overlook these common tax deductions that could save you money.
When you hurry through your tax return, you may miss valuable deductions that could produce a lower tax bill – or even more valuable tax credits that subtract dollar-for-dollar from your tax bill. (Deductions cut your tax bill in proportion to your tax bracket.) Consider these seven tax-cutters.
1. Earned Income Tax Credit (EITC) – The EITC is one of the most powerful tax tools for low-income families – and according to efile.com, approximately 20% of people who qualify for the credit don't take advantage of it. It's a fully refundable tax cut – if the credit is greater than the taxes you owe, you can receive the difference back as a refund.
To qualify, you must have earned income for the year and meet basic requirements regarding income and status.
2. Child Care Credit – If you meet income criteria, the Child Tax Credit allows you to take a deduction of $2,000 per qualifying child under the age of 17, which the Tax Cuts and Jobs Act (TCJA) doubled from $1,000 in tax year 2017. "That's credits for each child that you have that's under the age of 17," advises Betterment Head of Tax Eric Bronnenkant. "So, let's say you have three children under age 17 and you're below the income threshold. Generally, you're going to get a tax credit of $6,000."
3. Self-Employment Tax – Are you an independent contractor in the new gig economy? Don't forget to deduct your self-employment tax (the "employer" half of the taxes you pay as both an employer and an employee). This "above-the-line deduction" doesn't require itemization, and it lowers your adjusted gross income (AGI) – helping you qualify for other deduction thresholds.
4. Medical Expenses – Qualified medical expenses that go beyond 7.5% of your AGI are tax-deductible. Take advantage of this while you can, because the threshold will return to the traditional 10% of AGI in the future. For example, with a $40,000 AGI you could deduct total medical expenses over $3,000 for tax year 2019.
5. Charitable Donations – You may not have given a great deal to charity, but every little bit counts toward a deduction. Don't forget that you can deduct donated goods as well as cash contributions. If your vehicle is used for charitable purposes, you may be able to deduct the mileage.
Make sure that you have proper receipts for all your donations, and that all the donations were given to qualified charities. You can search for qualified charities on the IRS website.
6. Educational Credits — The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) allow you to claim educational expenses that you pay for yourself, your spouse, or a dependent child.
The AOTC covers the first four years of higher education and can provide a break of up to $2,500 per eligible student. The LLC, which can provide a break of up to $2,000, is designed for those who don't qualify for the AOTC because they've already graduated or aren't taking enough classes.
7. State and Local Taxes – You can deduct the state and local taxes that you paid during the tax year (income or sales taxes as well as property taxes). However, as of the last tax year, the state and local tax deduction has been capped at $10,000.
Don't let laziness or procrastination cost you money. Take advantage of all the tax deductions and credits that you can. Why should you let the government keep any more of your money than you have to?
The IRS and Treasury Department have extended the 2020 tax filing and payment deadline from April 15 to July 15, due to the COVID-19 pandemic. In the interest of safety and to curb the spread of the coronavirus, all Taxpayer Assistance Centers have been closed temporarily and face-to-face IRS services have been suspended until further notice. See the IRS Coronavirus Tax Relief page for the latest updates and stay safe.
Failing to pay your taxes or a penalty you owe could negatively impact your credit score. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.