No one wants to pay more to the Internal Revenue Service (IRS) than they have to when April rolls around. While we all have to pay taxes, part of lowering the amount you have to pay Uncle Sam is making the most of common tax exemptions and tax deductions.
Each tax exemption and tax deduction that you claim gets subtracted from your adjusted gross income so that your actual taxable income, the dollar amount that the government requires you to pay taxes on, is lowered as well. Because of this, it’s important to understand each and how you can utilize them.
A tax exemption is money you earned but don’t have to pay taxes on. (Note: Exemptions are different than deductions, which we will cover shortly.) According to the IRS, for the 2016 tax year, the personal exemption amount is $4,050. Claiming all the exemptions for which you qualify can really reduce your tax bill. The amount of exemptions you are allowed to claim depends on the status of your filing.
If You’re a Single Taxpayer: If you are single, you can claim a personal tax exemption for yourself. However, if you are listed as a dependent on someone else’s tax return, you are not allowed to file a personal tax exemption.
If You’re a Married Taxpayer, Filing Jointly with Your Spouse: If you are married, you may claim a personal exemption for your spouse as well. However, this only applies if you are filing a joint tax return with your spouse. Neither one of you can be listed as dependents on anyone else’s tax returns to qualify for this.
If You’re a Married Taxpayer, Filing Separately From Your Spouse: If you and your spouse are filing separate tax returns, you can only claim one exemption. However, you may be able to claim a tax exemption for your spouse if they do not file a tax return, don’t have income for the tax year and were not claimed as a dependent by another taxpayer.
If You’re a Head of Household Taxpayer: To be deemed a head of household, you are required to be unmarried as of the last day of the year, must have a qualifying dependent child living with you, and must have paid more than half of the expenses to maintain your household during the given tax year. This will typically make your tax rate lower than singles or those filing separately from their spouse, but there are a lot of caveats to be eligible.
If You’re a Taxpayer with Children: If you are a parent, you may claim a dependent exemption for each child, stepchild and/or foster child who you support. The child must be younger than 19 (unless they’re a student, then they must be younger than 24) and must have lived with you for more than half of the year. In addition, the child must not have provided more than half of their own support for the year.
If You’re a Taxpayer with Other Dependent Relatives: If you provide for a parent or sibling you may claim them as a dependent relative if their gross income is less than $4,050 and you provide more than half of your relative’s total support for the year. In some cases, the relative does not need to live in your household for you to be able to claim a dependent exemption for them. In order to establish if someone qualifies as your dependent relative, four IRS tests must be met: Not a qualifying child test, member of household or relationship test, gross income test and support test. You can find out the finer details of these tests on the IRS website.
Exceptions: You begin losing part of the benefits of your exemptions when your income rises high enough. For 2016, this phaseout begins at $259,400 for single taxpayers, $311,300 for married taxpayers who are filing joint taxes (or qualifying widows and widowers), $155,650 for married taxpayers filing separate returns, and $285,350 for head of household taxpayers. It phases out completely at $381,900 for singles, $433,800 for married and filing joint returns (or qualifying widows and widowers), $216,900 for married filing separate returns, and $407,850 for head of household taxpayers.
There are two main types of deductions: Standard deductions and itemized deductions and you may only file one or the other, so it’s important to consider your options carefully.
Standard Deductions: If you opt to file a standard deduction, the deducted amount will be based on your filing status. As of 2016, the standard deduction for a single taxpayer and for a married by filing separately taxpayer is $6,300, for a married and filing jointly taxpayer and qualifying widow or widower it is $12,600, and for the head of household taxpayer it is $9,300.
Itemized Deductions: While choosing the standard deduction for your filing status is easy, you may be able to save money by itemizing your deductions. And there are times you may not be eligible to file the standard deduction, like if you and your spouse are filing separately, and they are itemizing their deductions, you are required to do so as well.
When you itemize your deductions you list them on Schedule A on your tax return. This is where you’ll want to do some math — If your itemized deductions add up to more than your standard deductions, you will save money on your taxes by taking the extra steps to itemize your expenses. (Note: If you’ve never done this before, you may want to consider speaking with a tax accountant for guidance.)
Here are some common itemized deductions.
Charitable Donations: Have you been generous to charities this year? By tallying up your donations, you could lower your tax bill. For a check or cash donation, you must keep a record of the contribution in the form of a bank record or written record from the charity including the name of the organization, as well as the amount and date of the contribution. You can even deduct the fair market value of items you donate to charity.
Medical & Dental Expenses: Did you have a lot of medical visits this year? You may be able to deduct the costs of medical and dental care for you and your family. You may only deduct the amount of your total medical and dental expenses that exceed 10% of your adjusted gross income or 7.5% if you or your spouse is 65 or older.
Homeownership Deductions: Points are prepaid interest on home mortgages and these points may be deductible as home mortgage interest when you itemize your taxes. Other itemized deductions for homeowners include property taxes and mortgage insurance. Homeowners should be sure to take full advantage of these deductions.
Education Expenses: Did you take a class to improve your job skills? You may be able to deduct the expense. Tuition, books, supplies, lab fees and certain transportation and travel costs may all be deductible.
Casualty, Disaster and Theft Losses: Were you a victim of theft or a natural disaster such as a flood, hurricane, tornado or earthquake this year? You may be able to deduct casualty, disaster and theft losses relating to your home, your household items and your vehicles from your tax bill.
Lucy Lazarony also contributed to this article.