Most taxpayers either hope to pay as little income tax as is legally possible or try to receive the most money back on their income tax return. However, when tax season comes around, some taxpayers have not researched how they can minimize their income taxes. It's possible that they may end up paying more in taxes than is required by the Internal Revenue Service (IRS). If you want to reduce your taxable income or receive a larger refund, some things to consider are whether or not you are eligible for any tax deductions, if you are eligible for any tax credits, and if you should itemize when you file your income tax return.
Research All Possible Tax Deductions You May Qualify For
Tax deductions are qualified expenses that can reduce your taxable income. Most taxpayers tend to focus on the most well-known deductions. However, there are several lesser-known tax deductions that you may qualify for.
Business Travel Expenses
If you had to travel away from home on a temporary assignment for your work, you may be able to deduct related travel expenses. The IRS considers travel expenses to be the ordinary and necessary expenses of traveling away from home for your business, profession, or job.
If you made donations to any qualified charitable organizations, the value of the items donated may be deductible. It's important that you keep all the receipts for the purchases of your donated items. The IRS requires that you have written confirmation for all charitable donations.
Student Loan Interest
There are two different scenarios that may make it possible for you to deduct student loan interest. If your parents are paying the interest on student loans in your name, you can claim this as a deduction because the IRS views this as a gift from your parents. As long as your parents do not claim you as a dependent when they are filing their income taxes, you may qualify to deduct up to $2,500 of student loan interest that your parents paid for you.
In addition, you may be able to deduct some or all of the student loan interest that you paid. Taxpayers are eligible to deduct up to $2,500 of student loan interest. However, this deduction cannot be claimed if you are married but don’t file jointly, or if you or your spouse are claimed as a dependent on someone else’s return.
Qualified Education Expenses
Taxpayers may be able to deduct up to $4,000 of eligible higher education expenses for themselves, a spouse, or a dependent. If you are married but don’t file jointly or if you are claimed on someone else’s return, you will likely not qualify for this deduction.
Casualty, Disaster or Theft Losses
You may be eligible to deduct any casualty and theft losses relating to your home, household items, and vehicles if the damage is due to a disaster declared by the President of the U.S. For example, residents who were impacted by Hurricane Florence in 2018 were able to claim some tax relief because the hurricane was a federally-declared disaster.
These are many other items for which taxpayers may claim a deduction if they are eligible. The IRS provides special requirements for some deductions. It's in your best interest as a taxpayer to refer to IRS publications to make sure you are eligible before claiming any of these items on your tax return.
Claim All Available Tax Credits
Credits are another way of reducing your taxable income. However, it can be said that they are more effective than deductions at reducing your tax bill. Credits are netted directly against the amount of income tax you owe, rather than merely reducing the amount of income upon which you owe tax, as tax deductions do.
Earned Income Tax Credit
The Earned Income Tax Credit is a tax credit available that helps taxpayers with low incomes. The credit reduces the amount of tax owed on a dollar-for-dollar basis. If the amount of this credit is greater than the amount of tax that a taxpayer owes, they may be eligible for a refund.
Child and Dependent Care Credit
The Child and Dependent Care Credit is a credit available to some taxpayers who are working or looking for work and so have to pay for the care of their children, for a disabled spouse, or for a qualified dependent.
Child Tax Credit and the Additional Child Tax Credit
The Child Tax Credit and the Additional Child Tax Credit may be available to you if you have qualifying children. The Child Tax Credit (the Additional Child Tax Credit) is in addition to the Child and Dependent Care Credit.
Lifetime Learning Credit
The Lifetime Learning Credit is available to taxpayers in the United States who have incurred educational expenses within a given tax year. It is intended to help offset the cost of education. For this credit to be claimed by a taxpayer, the student must attend school on at least a part-time basis.
American Opportunity Tax Credit
The American Opportunity Tax Credit is a credit for qualified education expenses paid for by an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. In order to qualify, you must be enrolled at an eligible educational institution and be enrolled at least half time for at least one academic term for the given tax year.
If you are eligible for any of these tax credits, they can substantially reduce or even eliminate the amount of taxes that you owe. They may also increase the amount of your tax refund. In some cases, taxpayers may be eligible for a refund even if there were no taxes withheld from their income for the year as a result of these tax provisions.
Decide If You Should Itemize Your Tax Return
Something that every taxpayer should take into account is whether or not they should itemize deductions. Generally, you should itemize your deductions if it results in a lower total taxable income than if you claim the standard deduction. However, there are certain cases in which you will have no choice. For example, if you file a joint return with your spouse and you itemize your deductions, your spouse must do so as well.
Making the choice to itemize your deductions is generally recommended if you:
- Incurred substantial unreimbursed medical and dental expenses in a given tax year
- Paid interest or taxes on your home or other personal property
- Had large unreimbursed casualty or theft losses
- Donated large contributions of cash or tangible goods to a charitable organization
Previously, there were income limitations for itemized deductions. Taxpayers with adjusted gross incomes (AGI) above certain levels were subject to limits on how much they could claim in itemized deductions. The Tax Cuts and Jobs Act (TCJA) suspended this limitation for tax years 2018 through 2025.
The Bottom Line
The IRS has many rules for determining who is eligible to claim certain deductions and tax credits. It is important to review their instructions or work with a tax professional in order to determine your eligibility. A tax professional may be able to help you maximize your eligibility for tax credits and deductions.