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Over the last several years, and especially this year, the landscape of tax credits and deductions has been rapidly changing. The various government programs available has only gone upward. The scope of eligibility, much like inflation, has also widened substantially.
Even when using popular tax software, figuring out what you are eligible for can be confusing and lead you in the wrong direction if you aren’t paying attention closely.
In this article I’ll give you the low down on the top tax credits and deductions that you should look out for. Given all recent changes, they can be easily overlooked.
But first, let’s look at what exactly a credit and deduction are and how they differ.
What is a Tax Deduction?
Very simply, a tax deduction allows you to lower the amount of your income that is taxable. For example, if you earned $100,000, a tax deduction could lower the amount that is subject to taxes.
If the amount of taxable income you have drops to $0, a tax deduction would not be beneficial. You would not be able to get more money back from the government than you paid in taxes.
What is a Tax Credit?
A tax credit is quite a bit different than a tax deduction. In essence, if you are eligible for a tax credit you will receive the specified amount as a credit towards what you owe.
For example, if you earn $100,000, and owe $10,000 in taxes then a credit of $5,000 would lower your balance to only $5,000 owed. A tax credit is an amount that can be used to directly offset the amount of taxes owed, not reduce eligible income that is taxable.
What about a Refundable Tax Credit?
Some Tax Credits are also refundable. This means that if your tax credit exceeds your tax bill you will receive a check in the mail for the difference. This means you could potentially get more money from Uncle Sam than you paid into the system.
Top Tax Deductions
- Charitable Contribution Deduction – Despite the stressed out, media obsessed world we currently live in Charitable Contributions still reign supreme. You can still claim the standard deduction if your charitable contributions don’t exceed $300 for 2020. Otherwise, you should itemize your charitable giving (assuming your overall deductions exceed the standard deduction.)
- Student Loan Interest Deduction – Capped at $2,500, the Federal Government allows students or those who borrowed on a student’s behalf (if they are dependents) to deduct interest accrued on specific loans.
- Tuition and Education Fee Deductions – In addition to loan interest, an additional $4,000 can be deducted for educational fees and tuition in the year they were accrued. This deduction does not require itemization… but you will need to meet the modest income requirements to qualify.
- Educator Expenses – Qualifying school teachers can deduct up to $250 for school supplies that can include things such as masks and hand sanitizer. Of all the deductions here, this one seems the one that could use the largest attention by lawmakers… adding a 0 to the deduction limit to make it $2,500 during this difficult time seems like an easy win.
- Home Office Deduction – Many people have had the opportunity to work from home over the last year or two. With this deduction you can deduct items that are related directly to your work including repairs, utilities, rent, and other items for your home office. Keep in mind, it can’t be used for things unrelated to your work activity.
Top Tax Credits
- Recovery Rebate Credit – If you didn’t receive the full amount of the coronavirus stimulus checks during 2020 or 2021 then this is the credit you will need to investigate. By applying for this credit, you will be able to receive any missing payments via your tax refund.
- Sick Leave for Self-Employed Individuals Credit – For every day missed due to COVID-19, some entrepreneurs may be able to collect up to $200 per day. As with all tax credits, specific timing and other circumstances are required to collect.
- American Opportunity Tax Credit – This credit is worth up $2,500 and is available for tuition expenses directly related to only the first 4 years of college. These expenses can include items such as supplies and books… even if the expenses weren’t charged directly from the school.
- Lifetime Learning Credit – This credit is targeted towards a broad swath of education and skill attainment courses. It is worth up to $2,000 but does have somewhat restrictive income requirements.
- The Retirement Savings Contribution Credit (Saver’s Credit) – With a maximum value of $4,000 for joint filers, the saver’s credit is a great way for those with low income to save towards retirement. Up to 50% of any contribution made towards a qualified retirement plan can ultimately be redeemed in the form of the credit.
Tax Deductions and Credits can tip the scales in your financial favor if you should happen to qualify for them. Not missing out on programs and regulations that benefit your tax situation requires paying attention and due diligence.
So, what’s next? Hiring a tax pro (human or software based) is an important first step when tackling tax deductions and credits.
Keep in mind that I wrote this article as opinion-based blog and I am not a tax expert… what you have read here is not tax advice.
One thing that I have learned over the years is that taxes regulations can be some of the most fluid laws out there. The ebb and flow is difficult to keep track of… arm yourself with an expert to not only get the most bang for your buck but keep yourself out of trouble as well.