As tax season approaches, it’s important to understand what expenses you can claim as deductions on your tax return. Here is a comprehensive guide to tax deductions that can help reduce your taxable income and maximize your savings.
What are Tax Deductions?
A tax deduction is an expense that can be subtracted from your total income, which decreases the amount of taxable income you have for the year. By lowering the amount of taxable income, you’ll end up paying less in taxes overall.
Types of Tax Deductions
There are two types of tax deductions – standard and itemized. Standard deductions provide a fixed dollar amount based on your filing status. Itemized deductions allow taxpayers to deduct specific expenses they incurred throughout the year that exceed their standard deduction limit.
Standard Deduction
For the year 2021, the standard deduction amounts are:
- $12,550 for single filers
- $18,800 for head-of-household filers
- $25,100 for married couples filing jointly
Itemized Deduction
The following listed expenditures may qualify as itemized deductions:
Medical and Dental Expenses
If you had medical or dental expenses that were not reimbursed by insurance during the year and exceeded 7.5% (10% if younger than age 65) of adjusted gross income (AGI), then those amounts above this threshold could likely be deducted. Medical expenses may include fees for doctors visits, hospital stays,dental treatments,and prescribed medications.It does not include most over-the-counter drugs or cosmetic procedures such as plastic surgery.Note: It is recommended to consult with a professional accountant regarding claiming these expenditures,.
State and Local Taxes
Individuals who pay state sales taxes ora significant amount in state/local property taxes,I.e real estate levy(only until limitation applied under new rules)could potentially get benefits by claiming them while itemizing taxes. However, under 2017 Tax Cuts and Jobs Act (TCJA), the maximum limit of combined state/local/property tax deductions is $10,000 per return.
Home Mortgage Interest
Mortgage interest you paid on a qualified residence such as first or second home could be deducted as long as it does not exceed more than $750,000 for mortgages taken out after December 15th ,2017. However, note that the new standard deduction amount may make an itemized deduction claim unnecessary.
Charitable Donations
One can deduct up to 60% (formerly was up to 50% pre-CARES) of their AGI on cash donations made to charitable organizations(501(c)(3)) if they do not receive anything in exchange for them. You’ll have to itemize each pledge separately with written proof from organization.These donantions help one ensure charitable causes are supported while also reducing taxable income.
Expenses That Cannot Be Claimed
While there are many expenses that can be claimed as deductions on your tax return, there are some items that cannot be claimed.They include:
- Personal living and family expenses like rent/mortgage payments and household bills.
- Clothing purchases or maintenance (unless business-related.)
- Political contributions/campaigning cost.
- Any fines or penalties fees imposed by government agencies.
Conclusion
Knowing what tax deductions you’re eligible for is important when it comes time to file your taxes. Make sure you keep all receipts and documentation of any itemized deductions throughout the year so you can take advantage of these potential savings come April.
FAQs
Sure, here are three popular FAQs about tax deductions and their answers:
Q: Can I claim my home office expenses on my taxes?
A: If you work from home and use a designated space solely for your business or job, you may be able to deduct some of your home office expenses, such as rent or mortgage interest, utilities, repairs/maintenance, and depreciation. However, there are strict requirements for claiming these expenses as deductions on your tax return so it’s best to check with a tax professional before filing.
Q: Can I deduct charitable donations if I don’t itemize my taxes?
A: No. Charitable donations can only be claimed as a deduction if you itemize them on Schedule A of Form 1040. Additionally, the donations must meet certain criteria such as being made to qualified organizations like churches or charities registered with the IRS.
Q: What types of medical expenses can I claim as a deduction on my taxes?
A: You can typically only claim medical expenses that exceed 7.5% of your adjusted gross income (AGI). Qualified deductible medical expenses include payments made for dentists, doctors/surgeons/nurses/hospitals/clinics/laboratories/etc., acupuncture treatments given by an acupuncturist who is licensed in US/territory/patient’s country/etc., prescription medication & insulin costs even though it’s available over-the-counter but required by doctor’s prescription etc.. Expenses related to cosmetic surgery or procedures not deemed medically necessary generally cannot be claimed as deductions on one’s federal income tax return
