Many Americans are hoping for an increase in their tax refund this year compared to last. Although the size of that return depends on filing status, knowing about common deductions can help boost returns and boost returns.
Assuming you meet certain requirements for having a home office, the home office deduction may apply to you.
1. Mortgage Interest Deduction
Homeowners can reduce their taxable income by deducting mortgage interest paid, which is only available if itemizing your deductions ($6,100 for single filers and $12,200 for married couples in 2023). Taking this step will not only lower taxable income but may even save money when filing taxes!
The mortgage interest deduction applies to debt secured by your primary residence, such as a first or second mortgage, equity line of credit (HELOC) or home equity line of credit (HELOC). Additionally, loans secured by co-op apartments, mobile homes or houseboats qualify; provided they contain sleeping, cooking and bathroom facilities for use as your primary residence. Furthermore, you can claim deductions paid on loans used to buy your former spouse’s share after divorce as long as the former partner used the home as his or her primary residence before finalizing their ownership transfer after divorce proceedings are finalised – provided both parties used the home as their primary residence during that timeframe.
Be sure to review Form 1098 carefully each year when reporting mortgage interest paid; check that amounts charged match those reported by Form 1098, and consult a tax professional about possible mortgage interest deductions.
2. Medical and Dental Expenses
Taxpayers with high healthcare costs can make the most of the medical and dental expenses deduction by itemizing expenses that exceed 7.5% of their adjusted gross income (AGI), such as out-of-pocket payments to doctors and dentists; out-of-pocket costs associated with medication prescription; hearing aids; eyeglasses/contact lenses/acupuncture treatments and transportation to get to medical appointments.
Deductible expenses also cover some durable medical equipment and property that’s necessary to treat physical or mental illness, disease, or disability. For more information, see IRS Publication 502, Medical and Dental Expenses.
If you itemize deductions, be sure to save all receipts related to expenses you claim as deductions throughout the year. To maximize returns and maximize tax deductions, schedule healthcare-related treatments or exams prior to December’s end when they will become deductible purchases; or purchase office equipment and software at that time – these purchases may also qualify.
3. Student Loan Interest Deduction
Student loan interest deduction is an above-the-line deduction that reduces taxable income by deducting any amount paid as interest on education loans. While you can take this deduction even if you do not itemize other deductions on your tax return, its impact will diminish as your income does.
This deduction applies to federal and private student loans taken out for yourself, your spouse or dependents – as well as cosigned loans cosigned on someone else’s behalf provided they use eligible educational expenses as reimbursement.
Eligibility for student loan interest deduction is determined by your modified adjusted gross income (MAGI) and filing status, with the maximum interest claimed each year being $2,500 – this may decrease with income growth. Tax software such as TurboTax will automatically add 1098-Es into their system to determine eligibility, then subtract qualified student loan interest from your taxable income before calculating refunds or tax bills accordingly.
4. Child Care Expenses
If you paid someone to watch your children while at work, the IRS offers a tax credit known as Dependent Care Tax Credit or DCTC that may help offset your tax bill. To qualify for this credit, certain criteria must be met – expenses must qualify as “qualified child and dependent care expenses”, along with providing name, address and taxpayer identification number (TIN) details of care providers such as daycare centers, nannies or babysitters who provided care services.
Not unlike deductions, credits decrease your taxable income proportionately by providing a reduction of qualified expenses as a percentage of their value; their value tends to increase with earned income before declining as income exceeds certain thresholds.
Tax breaks of up to $3,000 for one qualifying person or $6,200 for two or more can provide significant financial relief to families. To claim these tax credits, fill out Form 2441: Child and Dependent Care Expenses.
5. Business Expenses
Business expenses can be deducted from company revenues to reduce taxable income and help lower taxable liabilities. The IRS provides guidelines defining what qualifies as valid expenses; advertising costs, office supplies costs and even health insurance expenses can all be deducted; however bribes or lobbying expenses cannot.
Dependent upon your industry, expenses that qualify as tax deductible can differ depending on who’s filing them. Ecommerce businesses in particular may qualify to write off expenses associated with website development and hosting as business expenses; Hootsuite social media management software as well as SEO optimization software like SEMRush are both deducted as deductions as well.
Tracking business expenses is key to optimizing deductions come tax time. Separating personal and business expenses as well as recording all payments and receipts will help determine the actual taxable income for your business. Bank fees for both personal and business accounts, annual service charges on credit cards, merchant transaction fees and merchant transaction fees all qualify as deductions; while cell phone and internet costs only qualify if used primarily for business.
6. Charitable Contributions
Charity donations are an effective way to support the causes you care about while lowering your tax bill, provided that you itemize deductions. Cash and other monetary gifts made to IRS-qualified 501(c)(3) public charities like churches, operating foundations, governmental bodies and donor advised funds may be deducted; fair market value property donations made to qualified public charities (such as certain private foundations, veterans organizations and fraternal societies) can also be claimed; the total deduction amount must also take into account noncash gifts and appreciated property donated annually.
Bunching charitable donations and itemized deductions together may allow them to exceed the standard deduction threshold. For example, you might accelerate donations scheduled for 2023 into 2024 if a higher marginal tax rate will produce significant tax savings. An IRA can also help make charitable donations from taxable distributions if related to split dollar insurance arrangements; for more information regarding deductible charitable donations see Publication 526; generally you must receive written acknowledgement and an estimate of goods or services you received in return.
7. Business Travel Expenses
As an employee or business owner who travels for work, travel expenses may be tax deductible. This is particularly important given that travel costs can add up quickly: airfare, train or cab fare and mileage (if using personal vehicle for business use).
In order to qualify as a tax deductible expense, your trip must take significantly longer than your daily commute to work and require sleeping away from home. Furthermore, meals and entertainment expenses must also meet IRS guidelines.
Meal and entertainment expenses involve taking clients, colleagues or prospects out to eat or attend an event – expenses which may only qualify as tax deductible if used solely for business purposes and don’t receive full reimbursement.
To qualify for tax deduction, meals or events must be business related and not luxurious or extravagant. Furthermore, you can only deduct meal and entertainment expenses paid with cash or credit card directly – reimbursement does not count.
8. Unreimbursed Employee Expenses
Before 2018, workers and self-employed individuals could deduct work-related expenses as part of their itemized deductions if they met certain criteria: expenses must be ordinary and necessary for running your trade or business and not intended for personal pleasure; employees that met these requirements could deduct unreimbursed work-related costs up to the 2% ceiling on Form 2106.
Construction workers or educators purchasing safety equipment or supplies for the classroom could benefit greatly from being able to deduct these expenses on their tax bill; but starting in 2018, due to Tax Cuts and Jobs Act (TCJA), this deduction has been eliminated. Howard Nilson of Maryland-based certified public accountant firm CPA Howard Nilson says many of his clients are still suffering as a result of this loss and has recommended they consider becoming independent contractors instead to be eligible for deductions they previously couldn’t take advantage of as employees.
