The Most Common Tax Deductions & 3 You Didn’t Know About

How can tax deductions save you money? What are some examples of deductions that might apply to you?

Both common tax deductions like those for dependent care and lesser-known deductions like those for energy efficient home improvements can lower your taxable income, meaning you’re taxed on a smaller amount. Understanding what you can deduct can help you save more money this tax season.

Let’s explore how to determine which common tax deductions you qualify for and how to claim them on your tax return.

Common Tax Deductions

Tax season doesn’t have to be a nightmare. There are a number of common tax deductions and credits available to help reduce your tax burden. Here are some key areas where you might find tax benefits:

Earning Under a Certain Income Level

If your income falls below a certain threshold, you might qualify for the Earned Income Tax Credit (EITC). This threshold varies according to your situation, but for single adults usually means an annual income of less than $63,398. This valuable credit can significantly reduce your tax bill or even result in a refund.

Taking Care of Dependents

Raising a family comes with its own set of expenses, and the tax code recognizes that. You can claim a Child Tax Credit for each qualifying child under the age of 17. Additionally, if you pay for childcare while you work or look for work, the Child and Dependent Care Credit can offer some tax relief.

Paying for Higher Education

The cost of higher education can be substantial, but there are tax breaks to help ease the burden. The American Opportunity Tax Credit and Lifetime Learning Credit offer tax breaks for qualified tuition and education expenses.

Saving Money for Retirement

Planning for your golden years is crucial, and the tax code incentivizes saving for retirement. Contributions you make to retirement accounts like IRAs and 401(k)s can often be deducted from your taxable income.

Investing in Clean Vehicles & Energy

Looking to go green? The government offers tax credits to incentivize the purchase of electric vehicles and energy-efficient home improvements. These credits can help offset the upfront costs of these eco-friendly choices.

Buying Government Health Insurance

If you purchase health insurance through a government marketplace established under the Affordable Care Act, you may be eligible for the Premium Tax Credit. This credit helps make health insurance more affordable by lowering your monthly premiums.

More Tax Breaks You Might Not Know About 

In addition to common tax deductions, there are lesser-known tax breaks that could save you money, like home office deductions and home improvements. Here are more ways to reduce your taxes.

1. Deductions for Your Home Office and Energy Upgrades

Your home can be a springboard for tax savings in unexpected ways. Let’s explore two areas where your home can contribute to a lower tax bill: claiming a home office deduction and making energy-efficient improvements.

Working From Home? The Home Office Deduction

While working remotely has become increasingly common, the tax implications can be confusing. Here’s a breakdown of who can and can’t claim the home office deduction:

• Freelancers and Business Owners: If you’re self-employed and run your business out of your home, you can deduct a portion of your home office expenses. This applies to freelancers, independent contractors, and small business owners.
• Remote Employees: Unfortunately, for tax years 2018 through 2025, the federal home office deduction is not available for salaried employees who work remotely. However, some states do allow this deduction, so check with your state’s tax authority.

Claiming Your Home Office Deduction

There are two methods to calculate your home office deduction: the regular method and the simplified method. The regular method requires calculating the percentage of your home dedicated to business use. This involves measuring the square footage of your home office and dividing it by the total square footage of your home.

The simplified method offers a more straightforward approach. You can deduct $5 per square foot of your home office, up to a maximum of 300 square feet.

Energy Efficient Home Improvements: Save Money Now and at Tax Time

Upgrading your home to be more energy-efficient can not only save you money on your utility bills but also qualify you for tax credits.

• Who Qualifies? Homeowners who install certain energy-efficient improvements in their primary residence may be eligible for the Residential Clean Energy Credit.
• Qualified Expenses: This credit covers a variety of improvements including new windows, doors, insulation, and certain energy-efficient appliances. The credit amount varies depending on the specific improvement made.

2. Deductions for Your Job Search Expenses

Under specific circumstances, the Internal Revenue Service (IRS) allows deductions for certain job search expenses, helping to offset these costs.

Who Can Write Off Job Search Expenses?

Unfortunately, the Tax Cuts and Jobs Act of 2017 suspended the ability to deduct job search expenses for most taxpayers for tax years 2018 through 2026. However, there is a silver lining.  This suspension does not apply to active members of the Armed Forces who are required to move due to a permanent change of station. Military personnel can still deduct certain job search expenses related to their new location.

What Job-Related Expenses Can Be Deducted (and Why)?

For those who don’t qualify under the military exception, there are still ways to potentially save on taxes during your job search. Here’s how:

• Itemized Deductions: While you can’t deduct job search expenses directly, you may be able to claim them under miscellaneous itemized deductions. However, there’s a catch: the total amount of miscellaneous itemized deductions must exceed 2% of your Adjusted Gross Income (AGI) to be beneficial.

Examples of Deductible Job Search Expenses:

• Resume and Cover Letter Writing Services: Professional help with crafting your resume and cover letters can significantly boost your application’s appeal. The fees associated with these services can potentially be deducted.
• Job Search Fees: Employment agencies and outplacement services often charge fees to connect you with potential employers. These fees may qualify as a deduction.
• Travel Expenses (with limits): If you travel for a job interview and the primary purpose of the trip is for the interview, travel costs like transportation and lodging may be deductible. However, personal expenses incurred during the trip wouldn’t qualify.

Important Considerations:

• Record Keeping is Key: Always keep receipts and documentation for any job search expenses you plan to deduct.
• Consult a Tax Professional: Tax laws can be intricate, so consider consulting with a tax professional to determine if deducting job search expenses makes sense for your specific situation.

By understanding these potential deductions, you can make your job search more cost-effective and maximize your tax savings. Remember, even if you can’t deduct job search expenses directly, there are still ways to potentially save money during your career transition.

3. Writing Off Business Expenses

Running a business involves a multitude of expenses. Many of these costs can be deducted from your taxable income, lowering your overall tax burden.

The IRS allows deductions for ordinary and necessary expenses incurred in the operation of your business. Here’s a breakdown of what this means:

• Ordinary: The expense is common and accepted in your industry. For example, rent for office space is an ordinary expense for most businesses.
• Necessary: The expense is helpful and appropriate for your business, even if not absolutely essential. For instance, website hosting fees might not be strictly necessary, but they are crucial for many businesses to operate.

There’s a wide range of expenses that can potentially qualify for deductions, including:

• Business-related travel: Mileage driven for work purposes, flights for business meetings, and lodging during work trips.
• Office expenses: Rent, utilities, office supplies, and equipment depreciation.
• Marketing and advertising costs: Website development, online advertising, and promotional materials.
• Professional fees: Legal and accounting fees related to running your business.
• Employee wages and benefits: Salaries, bonuses, payroll taxes, and employee health insurance.

Claiming Your Deductions

To claim business expense deductions, you’ll need to meticulously track and document your spending. Here are some key steps:

1. Maintain Organized Records: Keep receipts, invoices, and bank statements for all business-related expenses.
2. Categorize Your Expenses: Organize your records into categories that align with the IRS tax forms.
3. Choose the Right Deduction Method: The IRS offers two methods for claiming deductions: the cash method and the accrual method. Consult with a tax professional to determine which method is most suitable for your business.
4. File Your Tax Return: Report your business expenses on the appropriate tax form, following the instructions provided by the IRS.

The IRS website offers a wealth of information on business expense deductions, including a comprehensive guide with in-depth explanations, specific examples, and links to relevant tax forms.

By familiarizing yourself with these key points and utilizing the IRS resources, you can effectively navigate the world of business expense deductions and maximize your tax savings.  Remember, consulting with a tax professional is always recommended to ensure you’re claiming all the deductions your business is entitled to.

Conclusion

Tax season doesn’t have to be overwhelming. By familiarizing yourself with common tax deductions and exploring lesser-known options like home office deductions and job search expenses (for military personnel), you can significantly reduce your tax bill. Remember, keeping meticulous records and consulting a tax professional when needed are crucial steps to maximizing your tax savings. So, don’t be afraid to delve deeper—you might be surprised by the tax breaks waiting to be discovered!