In the US tax system, there are many tax deductions and credits that you can take advantage of to lower your tax burden. Tax deductions lower your taxable income, thus reducing the total amount that you pay in the form of tax to the Govt. Tax credits directly lower your taxes as they are taken after your taxable income is computed, and so they represent dollar for dollar reduction of the taxes that you pay. It is always advisable to take advantage of any deductions and tax credits that may be available to you.
Deductions And Its Types
Tax deductions can be divided into basically two types:
Standard Deductions: As a tax payer, you can opt for a standard deduction which means that it is a flat dollar amount that reduces your taxable income. It is calculated on basis of your age, status, number of dependents, disability and marital status. If you are using this type of deduction, you can claim an additional standard deduction on property taxes; it is limited to $500 or $1000 for joint filers.
Itemized Deductions: You can opt for this type of deductions if your total itemized deductions come out to be more than the standard deductions. In this case, you claim for deductions item wise and provide documentation for each deduction.
Some common itemized deductions include: medical and dental expenses, Insurance money paid for medical expenses, payment done for buying devices needed to treat or compensate a medical situation, mileage to and from the doctor’s place, state and local taxes paid (income and property taxes), investment interest, charitable donations to allowable recipients, churches, mosques and other places of worship.
The amount of itemized deductions depends upon the Adjusted Gross Income.
Tax Credits
Let’s understand some of the most common tax credits that you can avail of:
• First time homebuyer tax credit: If you are buying a home for primary residence, there is a new refundable tax credit for $7,500.
• Energy tax credits: When you make an energy conscious purchase, you qualify for this tax credit. For making your home more energy efficient and for buying certain energy efficient items, you can get tax credits.
• Adoption Tax credit: If you have adopted a child and paid for the expenses for the adoption process out of your pocket, you qualify for this credit. You can claim up to $11,650 tax credit per adopted child.
• Child tax credit: If your gross income falls in a certain range, you can claim for child tax credit for your child who is 16 years or younger and is dependent upon you.
• Retirement savings contribution credit: Individuals who save for their retirement may qualify for this tax credit. Depending on your overall income and filing status, this credit is a percentage of the savings, ranging from 10% and 50%.
• Education Credits: For college education expenses, you can claim for three types of credits: tuition and fees tax deduction, Hope credit and lifetime learning credit. Credit is given on the amount paid as admission and tuition fees.
These are just a few examples; there is a longer list of tax credits that you can avail of. For more information, you may take the help of a tax professional or go to the official website of the IRS.