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Update: Due to the pandemic, the IRS has extended the tax deadlinefor the 2020 tax year from April 15, 2021 to May 17, 2021. This only applies to individual federal income returns and tax payments, not a state’s income tax deadline, including state payments or deposits.
It’s unavoidable—we all have to do our taxes for the 2020 tax year. But if you play your cards right, you can substantially reduce your taxable income. Tax exemptions, tax deductions and tax credits change your adjusted gross income (AGI), lowering your tax bill in the process.
In 2017, the Tax Cuts and Jobs Act (TCJA) changed or eliminated many of the exemptions, deductions and tax credits traditionally available to American taxpayers. Feeling daunted? We’re here for you. To get you ready to file your 2020 taxes, we’re here to break down those tax exemptions and deductions.
Tax deductions, tax credits, tax exemptions—tax break terminology can be confusing. Let’s demystify the lingo with a brief explanation of each type.
In a nutshell, tax deductions reduce your AGI. You subtract deductions from your gross income and sometimes, you’ll end up in a lower tax bracket as a result. Popular tax deductions include the student loan interest deduction, the medical expenses deduction, the IRA contributions deduction and the self-employment expenses deduction.
Tax credits reduce the amount of tax you owe. Simply put, they act like money-off vouchers for your final bill. Common tax credits include the child tax credit, the lifetime learning credit, the earned income tax credit and the residential energy credit.
Before tax year 2018, everyone got a $4,050 personal tax exemption. Taxpayers then got a $4,050 exemption for each dependent in their household. When the TCJA passed in 2017, it eliminated this exemption, almost doubled the standard tax deduction and increased child and dependent credits. So, no more personal or dependent tax exemptions until at least 2025, when the TCJA expires.
When you file your taxes, you can use the standard deduction or itemized deductions to offset your taxable income. Since tax year 2020, the standard deductions have been:
If you take the standard deduction, you can’t itemize your deductions. Many people go for the standard deduction because it amounts to more than the total value of their itemized deductions. Hefty medical bills, disaster losses and large charitable contributions can make itemization worthwhile, however.
We’ve briefly covered medical bills, disaster losses and charitable contributions, but let’s go into more detail. Here’s a few more common tax deductions:
Tax credits reduce the amount of tax you have to pay. Two distinct types of tax credit exist:
There are lots of different individual tax credits. Let’s talk about a few of the most popular credits in more detail:
Have you ever considered the tax status of your business? Some organizations are tax-exempt, so they don’t pay any taxes whatsoever at the federal level. It might sound good, but there’s a catch. To achieve tax exempt status, you can’t be a for-profit business, and you can’t receive a profit-based payout from your business.
Tax-exempt business types include:
Tax-exempt businesses are often—but not always—also exempt from state and local taxes once they receive federal tax-exempt status. This rule varies from state to state, however.
Do you find tax season nerve wracking? You’re not alone. Every year, millions of Americans wait until the last minute to file their taxes. Some of them owe taxes, while others feel intimidated by the filing process. If you’re in either category, TaxAct® can help.
Easy to use and packed with helpful tips, TaxAct Free is ideal if you’re a simple federal filer with dependents. If you need to itemize deductions, own stocks and bonds, receive rental property income or have a similarly complex tax situation, go for TaxAct Deluxe or Premier. Freelancers looking for a low-cost, high-value alternative to a traditional accountant frequently choose TaxAct Self Employed.
Tax breaks traditionally fall into three categories—tax exemptions, tax deductions and tax credits. In 2017, the TCJA put tax exemptions on the back burner until at least 2025, leaving deductions and credits alone on the table for tax year 2020. You can itemize your deductions or you can choose the standard deduction when you complete your taxes.
If you need a little extra help this tax season, check out TaxAct. Intuitive and loaded with good advice, TaxAct helps pinpoint missed deductions and tax credits, minimizing your tax bill—or maximizing your return.
Disclaimer: All TaxAct offers, products and services are subject to applicable terms and conditions. Price paid is determined at the time of filing and is subject to change. The TaxAct® name and logo are registered trademarks of TaxAct, Inc. and are used here with TaxAct’s permission.
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