Some people would rather sit on jury duty than prepare their taxes. 8% would rather have a tooth pulled.
It is likely that completing your taxes each year feels like pulling teeth. It's really important to understand how tax deductions work, considering that over $1 trillion is claimed every year.
Don't worry, if tax deductions have you confused, you'll be fine. We have put together a guide that will answer your biggest questions about tax deductions.
Should you claim the standard deduction or itemize?
The decision to claim the standard deduction is a big one when it comes to filing taxes.
You can claim the standard deduction to offset some of your general expenses. Depending on your tax filing status, this deduction reduces your income by a certain amount. It is adjusted for inflation each year.
The standard deduction amounts are for tax year 2020.
The price is $12,200.
A married couple filed for $24,400.
A married couple filed separately for $12,200.
The head of household is $18,350.
If you think you qualified for more tax write-offs than the standard deduction is worth, you can choose to deduct your taxes. The owner and CEO of Boundless Tax said that this means forgoing the standard deduction and using your actual expenses in certain pre-defined categories to push your deductions higher.
He said that it is worth checking if itemizing your deductions would save you more money on your return.
How do you know which option is the best? If all of your deductible expenses add up to more than the standard deduction, then it makes sense to deduct them. If your deductible expenses add up to less than the standard deduction, you have to claim it.
The most difficult part of this decision is figuring out if your expenses qualify as deductible. Hire a tax professional to complete your return and find out for sure. Most popular tax software programs can run the numbers and choose the best option for the average taxpayer.
The standard deduction will be your best bet. If you aren't self-employed, don't own your home, have few medical expenses, and don't make large charitable contributions, there's a good chance you'll be better off claiming the standard deduction. About 90 percent of taxpayers do.
Understanding tax deductions is important. There are tax credits.
When it comes to potential tax write-offs, the terms "deduction" and "credit" are often used interchangeably. There are important differences between how they can be claimed and how your tax bill is affected.
Tax deductions reduce the amount of income that is subject to tax. Tax credits are even more valuable for most people because they reduce your total tax bill. A tax credit will reduce your tax bill. A deductible expense of $1,000 will reduce your tax bill by a fraction, depending on your tax rate. A $1,000 deduction reduces your tax bill by $200 if you have an effective tax rate of 20 percent.
What about tax exemptions?
The Tax Cuts and Jobs Act, which was passed at the end of last year, involved some of the biggest changes to the tax code in decades. Last year was the first time that we felt any repercussions, with some smaller changes coming to us this tax season.
The personal exemptions were phased out. Each dependent claimed on your return was worth $4,050 prior to the year 2017, according to Janas. This was added to the standard deduction. If you were married with two children, you would have claimed a $29,200 deduction between the four exemptions and the standard deduction.
Personal exemptions are no longer available. The standard deduction has increased to make up for the loss of personal exemptions.
Tax deductions have changed recently.
There were many changes to how tax deductions work. The standard deduction was increased.
Many deductions were killed off completely. A cap was placed on property taxes. Taxpayers used to be able to claim their total property taxes paid, but now they can claim a maximum of $10,000 per year in property taxes.
The same applies to mortgage interest. Taxpayers used to be able to deduct interest on up to $1,000,000. The amount of the mortgage is capped.
Work-related expenses, tax preparation fees, and a host of other expenses have been suspended or eliminated.
There are common itemized tax deductions.
There are still many ways to reduce your income even after the recent changes to tax deductions. As you prepare your tax return, keep in mind the following itemized deductions.
If you donated to a charity in the year, you can write off the value if you itemize your taxes. You can deduct your travel expenses, including tolls and parking fees, but you can't deduct the value of your time spent volunteering.
State income or sales and local tax is still available to those who itemize even though the SALT deduction was capped at a combined $10,000. You can deduct both state income tax and state sales tax if you get the biggest tax deduction.
If you are self-employed and use part of your home to conduct business, you can deduct home office expenses such as rent or mortgage interest, utilities, maintenance and more, based on the square footage of that area. You must keep in mind that the space you claim must be used for business purposes.
Self-employed taxpayers who use their vehicles to conduct business can deduct mileage expenses. You can claim a percentage of your vehicle expenses, such as gas, insurance, repairs and depreciation.
Self-employed individuals can deduct their health insurance premiums. If you are self-employed, you might be able to deduct health insurance premiums.
If you itemize, you may be able to deduct additional medical expenses if they exceed 10% of your adjusted gross income. This includes preventative care, treatment, surgeries and more, as well as travel expenses for medical care such as gas mileage, bus fare and parking.
Don't forget the tax deductions and credits.
Even if you don't take the standard deduction, there are several tax credits and "above-the-line" adjustments to your income that you may be able to claim.
You can deduct retirement contributions from your taxes if you make them to an IRA, 401(k) or other tax-advantaged retirement account. The guidelines for your particular account type vary, so be aware of the rules surrounding this deduction.
If you borrowed student loans to pay for college, you may be able to deduct up to $2,500 in interest. As your income increases, the deduction phases out.
If you gambled with your money, you might be able to write off some of the losses, but only if you win a lot of money. If you win at least $500 on lottery tickets, you can deduct the entire amount spent.
Two education credits are available. The American Opportunity Tax Credit is worth up to $2,500 for the first four years of college. If you claim this credit, you can get 40 percent of the credit back to you, up to $1,000. The Lifetime Learning Credit can be used for qualified expenses related to undergraduate, graduate or professional courses. There is no limit on the number of years you can claim this credit.
Depending on your filing status, you may be able to claim up to $3,000 for child and dependent care for a child under 13, an incapacitated spouse or parent, or another qualified dependent, if paying for care allowed you to work or actively look for work.
If you don't qualify for the child and dependent care credit, you can still get the other dependent credit. You can claim up to $500 per dependent that you support.
Depending on your income level, marital status, and number of kids, you can get an earned income tax credit of between $529 and $6,557 in 2019.
This is not an exact list of the tax deductions available to you. There are many ways to reduce what you owe in April, so take the time to investigate the various deductions you might qualify for. It is always a good idea to hire a tax professional if you are not sure.
The article was originally on HuffPost.
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