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A Quick Guide to Common Tax Deductions, Credits and Exemptions

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Tax Deductions

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NOTE: Due to the COVID-19 coronavirus pandemic, the IRS has extended the federal tax filing and payment deadline to July 15, 2020. The recent relief package passed by Congress may have additional tax implications. Please contact a tax adviser for information you may need to complete your taxes this year. Learn More.

Note: This article is informational only and you should consult your tax professional for your specific tax questions.

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    Taxes are inevitable, but the amount you pay isn’t. One way to lower the amount you pay to the Internal Revenue Service is to make the most of available tax deductions, credits, and exemptions. These help lower your taxable income and pay less in taxes. To help keep your tax bill low, determine if you can benefit from the common deductions and credits below.

    Tax Deductions vs. Tax Exemptions vs. Tax Credits

    One of the most confusing aspects of taxes is all the various deductions, exemptions, and credits you can take advantage of—if you know how.

    • Tax deductions allow you to deduct from your income before you calculate the amount of tax you owe. This lowers your taxable income, ideally pushing you into a lower tax bracket.
    • Tax exemptions were effectively discontinued until 2025 as part of the Tax Cuts and Jobs Acts in 2017. Deductions have been increased to compensate for the loss of personal and dependent exemptions.
    • Tax credits are dollar-for-dollar reductions in your tax bill. You subtract tax credits from the amount of tax you owe.

    Tax Deductions

    When filing your personal income tax, you have two options for deductions:

    • Taking the standard deduction
    • Using itemized deductions

    You can’t take the standard deduction if you itemize. And you can’t itemize if you take the standard deduction, so it’s important to determine which one benefits you most.

    Standard Deduction

    The standard deduction is a single amount that is deducted from your total gross income. The resulting number is your adjusted gross income (AGI), and that’s what you use to determine your tax bracket and pay taxes.

    The amount of your standard deduction depends on your filing status. For the tax year 2019, the standard deduction for those filing as single is $12,200. That’s an increase of $200 over the previous year.

    Standard Deduction by Filing Status for tax years 2019 and 2020

    Filing Status

    2019

    2020

    Single

    $12,200

    $12,400

    Married Filing Jointly

    $24,400

    $24,800

    Married Filing Separately

    $12,200

    $12,400

    Head of Household

    $18,350

    $18,650

    Source: IR-2018-222 and IR-2019-180

    Itemized Deductions

    Itemized deductions are individual tax deductions you can take in lieu of the standard deduction. Common itemized deductions include mortgage interest paid, property taxes, medical expenses and charitable donations.

    While choosing the standard deduction for your filing status is easy, you may be able to save more money by itemizing your deductions. There are also times you may not be eligible to file the standard deduction, such as if you and your spouse are filing separately, and your spouse is itemizing their deductions. In that case, you’re required to itemize as well.

    To make the decision about whether to itemize, you have to do some math.

    • If your itemized deductions add up to more than your standard deduction, you can save money on your taxes by taking the extra steps to itemize your deductions.
    • If they don’t add up to more than your standard deduction, stick with the standard.

    If you do itemize, you have to use Schedule A on the Form 1040 tax return.

    Common Itemized Deductions

    The IRS provides for a wide range of itemized deductions. To ensure you are catching all possible deductions, you might want to consult a tax pro or use tax preparation software. Some of the most common itemized deductions are summarized below.

    1. Charitable contributions. If you add up your charitable contributions to qualifying organizations for the year and itemize, you may be able to lower your tax bill. You can even deduct the fair market value of items you donate to charity. Keep a record of every contribution you make in the form of a bank record or a receipt from the charity, including the name of the organization and the amount and date of the contribution.
    2. Medical and dental expenses. You may be able to deduct the costs of medical and dental care for you and your family using the Medical and Dental Expenses deduction. This deduction lets you deduct the amount of your total medical and dental expenses that exceed 7.5% of your adjusted gross income.
    3. Home mortgage points. Mortgage points are prepaid interest on home mortgages. These points may be deductible as home mortgage interest when you itemize deductions on your taxes. Other itemized deductions for homeowners include property taxes and mortgage insurance.
    4. Work-related education expenses. You may be able to deduct the expense of work-related education from your taxes if you itemize. Tuition, books, supplies, lab fees, some transportation and travel costs and even the cost of research can all be deductible. Know that to claim this deduction, your costs have to be used to maintain or improve your job skills and required by your employer.
    5. State and local income, sales and property taxes. You can take a deduction for state and local income, sales and property taxes you paid in 2019 up to $10,000 or $5,000 for those who are married and filing separately.
    6. Personal casualty losses. If you were the victim of a disaster declared such by the president, you may qualify for a deduction. The deduction includes the loss of your home, household items and vehicles that insurance hasn’t covered from your tax bill.
    7. Business use of your home. According to the Intuit 2020 Report, 40% of workers in the US will be independent contractors by 2020. If that describes how you work, you may be able to deduct the cost of your home office if you use itemized deductions. Be careful with this one though, several restrictions apply.

    Tax Credits

    Tax credits are applied to the amount of tax you owe to reduce that amount. There are two types of tax credits:

    • Nonrefundable tax credits give you a refund only up to the amount you owe.
    • Refundable tax credits give you a refund even if it’s more than you owe.

    Common Tax Credits

    There are many tax credits available for individuals. To ensure that you are considering all the tax credits you qualify for, work with a tax professional or tax preparation software.

    1. Family and dependent credits. If you have children or other dependents that you claim on your taxes, you may qualify for dependent credits. For example, you can get tax credits for caring for your aging parents, as well as for costs associated with adoption.
    2. Income and savings credits. Depending on your income status you may qualify for the Earned Income Tax Credit or Saver’s Credit. The IRS also offers tax credits related to foreign taxes you’ve paid and capital gains. These types of credits may require extra caution to ensure you remain in compliance with other laws and regulations.
    3. Homeowner credits. Homeowners are often given the opportunity to apply tax credits, but these programs change often. The Obama-era first-time homebuyers credit has been eliminated, but the IRS currently offers a Residential Energy Credit for energy-efficient properties.
    4. Health care credits. Some health care tax credits allow you to offset the costs of health insurance premiums, depending on your health insurance coverage.
    5. Education credits. Many education-related expenses can be offset by education tax credits like the Lifetime Learning Credit.

    Know Before You File

    Understanding all your potential deductions and credits is critical to reducing your tax burden. Consider using a trusted tax software or online filing tool to help you navigate changes to deductions and exemptions that occur each year. If you do, you’ll maximize your return and avoid costly mistakes that can lead to penalties and fees.


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