As a taxpayer, it is important to be well-informed about the tax deductions that you are eligible for. Tax deductions can reduce your taxable income and ultimately lower your taxes owed. To help you maximize your deductions, we have compiled the ultimate guide to understanding tax deductions.
What are Tax Deductions?
Tax deductions are expenses that can be subtracted from your taxable income, which means that you will pay less tax. There are two types of tax deductions: standard deductions and itemized deductions.
Standard Deductions: Standard deductions are a fixed amount that the Internal Revenue Service (IRS) allows taxpayers to deduct from their taxable income based on their filing status, age, and other factors. This means that you do not have to itemize your deductions in order to claim them. The standard deductions for 2020 are:
– $12,400 for single filers or married filing separately
– $18,650 for head of household
– $24,800 for married filing jointly
Itemized Deductions: Itemized deductions are expenses that you can deduct from your taxable income if they exceed the standard deduction. Itemized deductions include expenses such as medical and dental expenses, state and local taxes, mortgage interest, charitable donations, and many others.
How to Qualify for Tax Deductions?
In order to qualify for tax deductions, you must meet certain requirements:
– You must file a tax return: Every taxpayer must file a tax return on or before the April 15th deadline.
– You must have a valid Social Security Number: To claim any deductions, you must have a valid Social Security number or a Taxpayer Identification Number.
– You must be eligible for deductions: Not all expenses are eligible for tax deductions. You can only claim deductions for expenses that are considered necessary and directly related to your job, business or investment.
Common Tax Deductions:
1. Home Mortgage Interest: Homeowners who have a mortgage can deduct the interest paid on their mortgage up to $750,000 for homes purchased after December 15, 2017.
2. State and Local Taxes: Taxpayers can deduct state and local income or sales taxes, property taxes and real estate taxes up to $10,000.
3. Medical and Dental Expenses: Taxpayers can deduct medical and dental expenses that exceed 7.5% of their adjusted gross income.
4. Charitable Contributions: Taxpayers can deduct charitable contributions made to eligible organizations up to 60% of their adjusted gross income.
5. Business Expenses: Self-employed individuals can deduct business expenses such as supplies, advertising, and travel expenses related to their business.
Understanding tax deductions can be a challenging task for any taxpayer. However, by knowing what deductions you are eligible for and how to properly claim them, you can ultimately save yourself a significant amount of money on your taxes. Remember to consult with a tax professional or use tax software to ensure that you are accurately claiming the tax deductions that you are eligible for.