Tax deductions are the State’s way of saying “thank you” or “we care”. This is an amount of money that can be subtracted from your gross income and not be subject to income tax and generally varies from one state to the other and is heavily influenced by the contributor’s own situation including factors such as age, medical conditions, relationship status or the existence of dependents. Even profession, hobbies and gambling can make a difference on your deductions. The most important thing is to be aware of the possibilities and check all that you qualify for.
Standard deduction or itemization?
Each state offers a standard tax deduction, which is usually computed as an average of the deduction amounts possible for the most common situations. Considered the lazy person’s deduction, this lump amount is what you get if you refuse to get your finances in order and see what you can really get back. In some cases, however, you might be better off with this, as the alternative, the itemized deduction, is sometimes below this amount and requires justifying documents for each deduction claimed. Usually low earners who make no contributions to charities, have no additional healthcare policies and are not self-employed are the best candidates for this option.
Itemization is for the financially educated, organized individuals who are able to collect invoices, receipts and other paperwork necessary in case of an audit and diligently store them. In the case of married couples, if one chooses itemization, the other one is obliged to do the same, so you need to come to terms in this regard with your significant other. This is a great option for high earners who contribute to charities or homeowners with active mortgages.
Relationship status and tax deductions
As mentioned before, your relationship status dictates the options you have for deductions, the amount you get if you opt for standard deduction and the way you split deductions with your spouse.
Single persons (including never married, divorced or widowed in the tax year) and married filing separately can deduct $6300, married filing together double that amount to $12600 and household heads (singles with dependents) qualify for $9300. These amounts change for spouses over 65 and individuals who are part or completely legally blind.
Let’s evaluate the most common categories of personal tax deductions when an itemized approach is considered.
Categories of tax deductions
1. Healthcare deductions
Out-of-pocket expenditure on healthcare can take a significant toll on a family’s budget; therefore, if such expenses are more than 10% of your gross income, you can claim a deduction. This healthcare deduction applies not only to yourself, but to your children, even if they are not your dependants, and any other person that you can claim as a dependant. The amounts you take into consideration are only those not covered by the health insurance.
You can also count dental care costs if not covered by insurance and any other medical expenses. Specialized treatments and anything prescribed by a certified physician might be deductible. Some even managed to get their swimming pool on the list, but be ready to show some heavy documentation backing such claims.
2. Charity deductions
Traditionally charity deductions are the most acceptable ways of claiming a reduction of your taxable income, but rules do apply. The most important thing is to select a reputable charity, approved by IRS, including fraternal lodge societies, and document your donation even if it is in kind. Get a receipt for cash, but also for gifts valuated at the right market value. If you are volunteering and making expenses to perform the work, such as buying materials to create something to sell as part of the charity, these expenses will count towards your deduction, if you save and file the invoices.
Other deductions include paying a babysitter while you volunteer, but never expect compensation for your own time dedicated to charity and subtract the value of any gifts received for your contribution, such as a pen or a mug. Check with your tax advisor the maximum limits admitted and make sure these follow the 20-30-50 rule.
3. Learning and work-related deductions
If you choose to continue your education after high-school, entering the lifetime learning pattern, any type of post-secondary courses can give you up to $4000 is tax savings for yourself, a spouse or dependent. Be sure just to check the maximum allowed limit for earnings to see if you qualify. Student loan interest is also deductible for up to $2500.
Involvement in education is also acknowledged for K-12 teachers who spend their own money for class materials. Their hard work and dedication qualifies them for a deduction of up to $250 a year.
Informal education can save parents up to $1050 per child under 13 if they decide to send them in summer camp, the same applying to disabled children receiving special care. The amount doubles for two children under 13 years old, but remains the same for 3 or more.
More deductions are available to those looking for a job, if their spending on this endeavor is more than 2%, which could happen when you take into consideration employment agencies and professional resume writing, car mileage if you go to an interview in a different city or moving costs once you accept the job. Even costs for moving your pet to another city following a job are deductible.
4. Financial deductions
The IRS gives you the opportunity to deduct state and local sales taxes, considering you have been diligent and saved all your invoices. You get to choose between local income taxes and sales taxes, but you can’t have both. For states that don’t have local income taxes it makes sense to select the sales option, especially when making large purchases such as cars or home appliances or even electronics. This is a good idea for newlyweds, who can get back some money on the ring, furnishing the home or even paying for the wedding, mostly anything that is outside normal spending habits.
Households or singles earning under $109 000 or married filing separately under $54 500 can claim tax deductions for mortgage insurance premiums starting with 2016 for mortgages accessed or refinanced starting with 2007.
5. Unusual deductions
Apart from the deductions listed above there are a myriad other deductions that some of you might qualify for. Just to take an example, since you have to pay a tax on gambling earnings, the converse is true and for gambling losses you get a tax deduction, if you have an accurate history of both your winnings and losses, as the deduction can’t be more than your gambling income.
If you are trying to kick bad habits such as quitting smoking, you might be allowed to deduce the amounts spent on a smoking cessation program as medical expenses, the same goes for losing weight or in some weird cases even sex reassignment operations. The creativity of accountants and people looking to save a little (or a lot) of money is sometimes endless.
Depending on your income category, spending habits and diligence regarding money and financial matters, there is always a possibility to get some money back from the state in the form of tax deductions, either as a lump amount named the standard deduction or by itemizing all the spending for which you could get something back. Choosing itemization transforms you and your spouse in accountants or makes you hire one to keep track of all necessary paperwork and computations, but all in all it could be worth, giving you enough money back to take a small vacation or refurbish a room.