You might be able to use the tax law to your advantage if you take the time to understand more about how it works. Let's start with two key tax concepts: credits and deductions. 2
Credits
Tax credits have more clout in lowering your tax burden than deductions because they are usually deducted dollar for dollar from your actual tax liability. Because tax credits usually have a phase-out period, you should consult a legal or tax specialist for precise details about your circumstances.
You may be entitled for the following tax credits:
The Child Tax Credit is a federal tax credit for families with children under the age of 17 who are financially dependent on them. Depending on your income level, the maximum credit is $2,000 per qualifying child. 1
The American Opportunity Credit provides a tax credit of up to $2,500 per qualifying student for four years of post-secondary education tuition expenditures.1
Those who have to pay someone to look after a kid under the age of 13 or another dependent may be eligible for a tax credit. For one qualifying individual, the Child and Dependent Care Credit is up to $3,000, and for two or more qualifying individuals, the credit is up to $6,000. 1
Deductions
Deductions are subtracted from your earnings before taxes are calculated, lowering the amount of money that is taxed and, as a result, your overall tax burden. Deductions, like tax credits, generally have phase-out limits, so consult a legal or tax professional for precise details about your situation.
Here are a few deduction examples.
Contributions to qualified charity organizations are tax deductible, subject to certain limitations. You may be able to deduct the fair market value of any property you donate in addition to financial contributions. You may also be allowed to deduct out-of-pocket expenses made when volunteering for a charity. 3
You may be eligible to deduct the mortgage interest you pay on a loan secured for your primary or secondary house provided certain conditions are met, which were modified in the 2017 Tax Cuts and Jobs Act.3
Deductions are allowed for amounts placed up for retirement in a qualified retirement plan, such as an Individual Retirement Account. The donation ceiling is $6,000 for those under 50, and $7,000 for those over 50. 1
Under the SECURE Act, you must begin taking required minimum distributions from a Traditional Individual Retirement Account (IRA) or qualifying retirement plan once you reach the age of 72. Withdrawals are taxed as regular income and may be subject to a 10% federal income tax penalty if taken before the age of 59 1/2.
If your medical and dental expenses surpass 10% of your adjusted gross income, you may be eligible to deduct the difference.4
Making the Tax Code Work for You
Understanding credits and deductions is essential to putting the tax code to work for you. But keep in mind that nothing in this post should be construed as tax or legal advice. It also cannot be used to evade federal tax penalties. Contact us with any questions you might have about how the tax code can work for you.
1. Internal Revenue Service, 2019
2. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
3. Internal Revenue Service, 2018
4. Tax Policy Center, 2019
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.