It is never too early to prepare for the upcoming tax season. If your allowable deductions are greater than your standard deduction, or if you are unable to use the standard deduction, you will most likely itemize deductions when the time comes to file your taxes. To determine how to calculate tax deductions you can use this tax calculator. It will help you decide whether to take the standard deduction or to itemize. If the latter is a better option, you will want to keep track of allowable expenses that can be itemized so you can gain the greatest benefit from those deductions. Although there are a variety expenses that can qualify to be itemized (from gambling loses to alimony payments), here are five of the most common.
1. Mortgage Interest
While you may cringe when looking at the amount of interest you pay each month on your mortgage, it can certainly be a benefit when it comes time to filing your taxes. In fact, the interest you pay on your mortgage is usually the largest determination when it comes to making the decision of whether to itemize your deductions or take the standard deduction. That’s because if you have a large mortgage debt, you most likely are paying quite a bit in interest, and tax season is a time to reap a bit of a reward on that debt.
It is usually quite easy to qualify for mortgage interest deduction considering you can deduct the interest paid on first and second mortgages up to $1,000,000 in mortgage debt if you are married filing jointly, or $500,000 if married filing separately. Mortgage interest points are also usually deductible on the year that you purchase your home, and the interest from home equity loans can also be itemized if it meets certain conditions.
2. Real Estate Taxes
While the tax deduction you receive from your mortgage interest is most likely to be one of, if not the largest deduction you can claim on your taxes, you can also take a deduction on paying your property tax. Yes, a tax deduction on the taxes you already paid! This deduction is based on the taxes you paid on the assessed value of your property. Since your lender is most likely the one responsible for paying that tax, make sure your property taxes are paid before taking the deduction. Also, if you bought a house this year you can also deduct your portion of the tax payment that was paid upon closing. Remember that this deduction can only be taken if you itemize your deductions. If you are inclined to purchase a house this year to limit your tax liability, make sure you use a mortgage calculator with taxes, insurance, and pmi to get a better understanding of your total payments each month.
3. Charitable Donations
Giving away a portion of what you have to those in need can be satisfying enough, however, the IRS also rewards charitable donations with a deduction in your taxes. If you plan to itemize, keep a careful record of the money and/or property (and its fair market value) you have donated to any qualified charitable organization. Also, although time volunteering for a charitable cause does not qualify for a deduction, buying supplies for a qualified organization does, as well as the miles you put on your car while volunteering. Keep a careful record of your miles when volunteering as well as receipts for supplies purchased.
If you pay tithes to a church with a tax-exempt status it will also qualify for a charitable donation. Again, make sure you have a receipt or another way to prove your donations. Keep a close record of your tithe paid as well as any other church donations and ask for a receipt at the end of the year to compare with your own records for tax purposes.
4. Medical and Dental Expenses
This can be a difficult deduction to qualify for since the total medical expenses for you and your family need to exceed 10% of your adjusted gross income (AGI), or 7.5% if you or your spouse are over the age of 65. However, if you and/or family members have had a difficult year with health, or if you think you might qualify for this credit for the coming year, be sure to keep close track of all medical receipts. Prescription medications, glasses and contacts, hearing aids, and even travel expense that accumulated because of medical care can also be deducted. Keep in mind, you cannot claim any expenses that you may have incurred but were paid through insurance. However, if you think you will qualify for this deduction, check with your accountant to get the greatest advantage from itemizing these medical expenses.
5. Student Loan Interest
If you are among the millions that left college with tens of thousands of dollars in student loan debt, this tax deduction can serve as a small (perhaps very small) consolation for all the interest you are paying. If you meet a certain income requirement and filing status, you can claim all the interest you paid the past year on your student loan up to $2,500. Since this is claimed as an adjustment to your income, you do not need to itemize this deduction to receive it. Unfortunately, as your income goes up, this deduction will phase out, so keep this in mind when determining your tax liability.
Side note: While deducting student loan interest can decrease your tax liability, paying off those student loans early can save a bundle in interest payments. Check out how much money you can save by adding extra money to your payment with this student loan early pay off calculator.
Tax season can be stressful, and at times financially painful. Notwithstanding, you should not pay more than your legal responsibility. With careful planning and the advice of a professional you can rest assured that you are not paying more than necessary by taking advantage of the deductions that the government offers.