Tax breaks can be an excellent way for individuals and businesses to save money on their taxes. There are numerous tax breaks available that can help reduce tax liability, and it’s important to understand them to take advantage of them. In this post, I’ll explain some of the most common tax breaks available to taxpayers, some of the less common but noteworthy and we’ll finish off by going over some Self-Employment tax breaks.
Common Tax Breaks:
- Child and Dependent Care Credit: The Child and Dependent Care Credit provides a credit for expenses paid for the care of qualifying children under age 13 or disabled dependents. The credit can be up to 35% of qualifying expenses, depending on income.
Child Tax Credit: The Child Tax Credit provides a credit of up to $2,000 per qualifying child. The credit amount phases out for higher-income taxpayers. The amount given per child has fluctuated over the last few years due to the provision of extra credits.
Homeownership: Owning a home can provide a range of tax breaks. Mortgage interest payments and property taxes can be deducted from your taxable income, resulting in a lower tax bill.
Mortgage Interest: Taxpayers who own a home and have a mortgage may be able to deduct the interest paid on the mortgage from their taxable income.
- Retirement Contributions: Contributing to a retirement plan, such as a 401(k) or IRA, can be a great way to reduce your tax bill. These contributions are generally tax-deductible, which means that the money you contribute is not counted as taxable income, resulting in a lower tax bill.
Student Loan Interest: Taxpayers who pay interest on student loans may be able to deduct up to $2,500 of the interest on their tax return.
Education Expenses: Certain education expenses, such as tuition and fees, may be deductible.
Charitable Contributions: Charitable contributions can also provide a tax break. If you donate money or goods to a qualifying charitable organization, you may be able to deduct the value of your donation on your tax return.
Health Savings Accounts: Contributing to a Health Savings Account (HSA) can also provide a tax break. HSA contributions are tax-deductible, and withdrawals used for qualifying medical expenses are tax-free.
Less Common Deductions but more deductions nonetheless!
Disaster Relief: Taxpayers who have suffered a loss due to a federally declared disaster may be eligible for tax relief, including deductions for casualty losses and extended tax filing deadlines.
Energy-Efficient Home Improvements: Homeowners who make energy-efficient upgrades to their homes, such as installing solar panels or upgrading to energy-efficient windows, may be eligible for tax credits.
Medical and Dental Expenses: Medical expenses that exceed a certain percentage of your income may be deductible. This includes expenses such as doctor visits, prescriptions, and medical equipment.
State and Local Taxes: Taxpayers can also deduct state and local taxes paid from their federal tax bill. This includes state income taxes, property taxes, and sales taxes.
Earned Income Tax Credit: The Earned Income Tax Credit (EITC) is a tax credit for low to moderate-income taxpayers. The credit amount varies depending on income, filing status, and number of qualifying children.
Adoption Credit: Taxpayers who adopt a child may be eligible for the Adoption Credit, which provides a credit for qualifying adoption expenses.
Alimony: Taxpayers who pay alimony may be able to deduct the payments from their taxable income, while recipients of alimony must include the payments in their taxable income.
Military Benefits: Members of the military and their families may be eligible for various tax benefits, such as combat pay exclusions and deductions for moving expenses.
Capital Gains: If you sell an investment for a profit, you may be subject to capital gains tax. However, if you hold the investment for at least one year, you may be eligible for a lower tax rate on the capital gain.
Foreign Income: U.S. taxpayers who earn income from foreign sources may be eligible for the foreign earned income exclusion, which allows them to exclude a certain amount of foreign income from their taxable income.
Alternative Minimum Tax: The alternative minimum tax (AMT) is a separate tax calculation that may apply to high-income earners. Certain tax breaks, such as the deductions for state and local taxes, are not allowed under the AMT.
Moving Expenses: Taxpayers who move for work may be able to deduct some of their moving expenses, such as transportation, lodging, and storage costs.
Municipal Bond Interest: Taxpayers who invest in municipal bonds may be able to exclude the interest earned from those bonds from their taxable income.
Job Search Expenses: Taxpayers who are searching for a new job may be able to deduct certain job search expenses, such as travel expenses and resume preparation costs.
Lifetime Learning Credit: The Lifetime Learning Credit provides a credit for qualifying education expenses, such as tuition and fees, for undergraduate or graduate education or courses to acquire or improve job skills.
There are several tax breaks available for self-employed individuals, including:
Deduction for business expenses: You can deduct expenses that are ordinary and necessary for your business, such as office rent, equipment, supplies, and marketing costs.
Self-employment tax deduction: You can deduct half of the self-employment tax you pay as an expense.
Retirement savings: Self-employed individuals can contribute to a tax-advantaged retirement account, such as a solo 401(k) or SEP-IRA, and deduct the contributions from their taxable income.
Health insurance deduction: Self-employed individuals can deduct the cost of health insurance premiums for themselves, their spouse, and their dependents.
Home office deduction: If you use a portion of your home exclusively for business purposes, you may be able to deduct a portion of your home expenses, such as rent, mortgage interest, property taxes, and utilities.
Business equipment depreciation: If you purchase equipment for your business, you can deduct the cost over several years through depreciation.
Mileage deduction: You can deduct the cost of using your vehicle for business purposes, either by tracking actual expenses or using the standard mileage rate set by the IRS.
Travel expenses: If you travel for business purposes, you can deduct expenses such as airfare, lodging, and meals.
Education expenses: You may be able to deduct the cost of continuing education courses or other training that is directly related to your business.
Deduction for bad debts: If you have unpaid invoices or other debts that are related to your business, you may be able to deduct them as bad debts.
Start-up expenses deduction: If you’ve recently started a business, you can deduct up to $5,000 of start-up costs in the first year of operation, with the remaining costs amortized over the following years.
Charitable contributions: If you make charitable donations as part of your business, you may be able to deduct them as business expenses.
Legal and professional fees: You may be able to deduct fees paid to lawyers, accountants, or other professionals for services related to your business.
Advertising and promotion expenses: You can deduct expenses related to advertising, marketing, and promoting your business.
Software and technology expenses: You can deduct the cost of software and technology used in your business, such as accounting software or a website.
These are just a few examples of the tax breaks that are available to individuals and businesses. It’s important to note that tax laws and regulations can change frequently and can vary by state, so it’s essential to stay up to date on any changes that may affect your tax situation. Filing your taxes on TurboTax or working with a tax professional can be a great way to ensure that you’re taking advantage of all available tax breaks and optimizing your tax strategy.
