When you're filing your federal income tax, it's a good idea to look for any deductions or credits that can reduce your total tax bill. A number of tax deductions for homeowners, owners of small businesses, people with children and those who have given money to charity are on the Internal Revenue Service tax deductions list. You can also save money on taxes by contributing to a retirement account.
Tax Deductions and Credits Explained
Legal ways to owe less on your federal income tax can generally be divided into tax deductions and tax credits. Tax deductions decrease the total amount of your income on which you must pay tax, while tax credits directly offset tax that would otherwise be owed to the IRS when you file. Tax credits are further divided into refundable tax credits, which can you get you money back from the government even beyond what you would owe in tax, and nonrefundable ones, which can only be used to offset actual tax owed.
In some cases, if you have money automatically taken from your paycheck to fund a retirement account such as a 401(k) or 403(b), you may effectively see the tax benefit in your paycheck before you file rather than having to wait until it's time to get a refund from the IRS.
States and local governments with income tax can have their own rules about deductions, though many follow IRS policies.
The Standard Deduction
Certain deductions can only be claimed if you itemize your deductions, specifying to the IRS exactly what deductions you're taking and why. Rather than itemize, you can also take what's called the standard deduction, which is $12,000 for individuals, $18,000 for heads of household and $24,000 for married couples filing jointly for the 2018 tax year. This can mean less paperwork and, often, even a higher deduction than you could claim based on your itemized expenses.
Some deductions, known as above the line deductions, can be claimed even if you take the standard deduction.
It can be a good idea to see how much you would be able to deduct by itemizing versus by filing with the standard deduction. A tax preparer or tax prep software may automatically run this for you.
Tax Deductions for Homeowners
If you own a house or condo, there may be a number of deductions available to you if you itemize. One is the deduction available for interest you paid on a mortgage, generally up to $750,000 worth of loans for a married couple filing jointly. Home equity loans used to pay for home improvements can also have their interest deducted. The mortgage interest deduction can help offset the cost of borrowing to buy a home.
Another tax deduction that's available to anyone, but can be particularly valuable to homeowners who must pay property, is the state and local tax deduction, sometimes called the SALT deduction. As of the 2018 tax year, it enables you to deduct what you pay in state and local taxes from your federal taxable income up to a total deduction of $10,000. This includes property tax and either income tax or sales tax that you've paid. The tax deduction was at one point uncapped before the present $10,000 limit.
Renters see fewer tax benefits on a federal level, although some states, such as Massachusetts, do allow tax deductions for renting your home.
Business Tax Deductions
If you run your own business, you may be able to claim many of your business expenses on your taxes. You will do this using a form called Schedule C, used in conjunction with the standard Form 1040 personal tax form.
Allowable business expenses include the costs of business travel, the use of your vehicle in business, a home office or separate work site and the costs of equipment you need to do your job. Health insurance that you buy for yourself can also be deductible if you are self-employed. Keep receipts and notes when you incur an expense for business so that you can prove to the IRS that it was a legitimate business expense.
Make sure to follow rules for how and when you can deduct specific types of expenses, including food you eat with clients or on business trips and the use of your vehicle for business operations. You don't need to itemize your personal deductions to deduct business expenses. Do note that deductions for personal expenses as someone else's employee have largely been eliminated under the current tax law.
Tax Deductions for Families
If you have children, you can claim a child tax credit that directly reduces your taxes based on how much money you make and how many children you have. The credit can be up to $2,000 per child, of which $1,400 is refundable. Generally, the child must be your legal dependent, your relative by birth or adoption and a legal U.S. resident with a Social Security number. Additional credits are also available for people caring for nonchild dependents.
If you have low or moderate income, you may also be eligible for the earned income tax credit, which can boost your refund from the IRS. Cutoff amounts depend on how much you make and the size of your family. You can use digital tools on the IRS website to determine if you're eligible.
Certain educational expenses, such as paying for college, can also lead to credits and deductions. If you're paying for yourself or someone in your family to go to college or other post-secondary school, check to see which you're eligible for. Some states also offer additional tax benefits for families or allow deductions for other expenses, such as paying for private school tuition. Check to see what's available in your state when you file your state tax return.
Deductions for Charitable Donations
If you itemize your federal deductions, you can claim a deduction for donations to charity. You can generally either deduct donations of cash or actual goods, usually at their fair market values.
Keep receipts of everything you donate, making sure to get them from the charity, as well as documentation of paying cash such as credit card statements or canceled checks. Keep whatever evidence you can of how much physical goods were worth.
If you donate goods worth $500 or more, you must fill out IRS Form 8283 and include it with your tax return. If you donate something worth $5,000 or more, you'll need to have it professionally appraised to demonstrate its value. Special IRS rules apply if you donate cars or investments such as stock.
Retirement Account Contributions
Contributions to individual retirement arrangements are deductible even if you don't itemize your deductions. You can contribute up to $5,500 per year to an IRA, or $6,500 if you're 50 or older. Rather than pay tax on that money when you earn it, you defer tax until you withdraw it at retirement age. That can save you money if you're in a smaller tax bracket at retirement time.
If you withdraw money early from an IRA or similar account such as a 401(k), you can face a tax penalty as well as owing the deferred tax unless special cases apply.
Avoiding Questionable Deductions
Some deductions are too good to be true. If you see anyone advocating sneaky ways to get more back on taxes, be skeptical.
While it might be tempting for some people to falsely claim deductions or credits they're not entitled to, you can face serious penalties from the IRS or even jail time if you file a fraudulent tax return. If you're not sure whether a deduction applies to your situation, you can contact the IRS for help or work with a paid accountant or tax preparer to figure it out.
- IRS: Credits and Deductions for Individuals
- Bankrate: Mortgage Tax Deduction Calculator
- IRS: Topic Number 503 - Deductible Taxes
- Smart Asset: What Are Above the Line Deductions?
- IRS: Instructions for Schedule C
- IRS: About Form 1040
- Smart Asset: All About Child Tax Credits
- IRS: Earned Income Tax Credit
- Massachusetts: Deductions on Rent Paid in Massachusetts
- IRS: Topic Number 506 - Charitable Contributions
- IRS: Publication 590-A (2018), Contributions to Individual Retirement Arrangements (IRAs)
Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.