The American Tax system is complicated. But sometimes the aspects that complicate your tax return can work in your favor.
I’m referring to the multitude of tax credits and deductions that are available to many American taxpayers. Some of these credits and deductions can save you hundreds, or even thousands, of dollars on your tax return.
And some of them are commonly missed.
For example, 1 in 5 taxpayers who are eligible for the Earned Income Tax Credit (EITC) don’t claim it. It’s hard to believe that a full 20% of eligible taxpayers miss out on this valuable benefit!
I’ll cover some of the more common tax credits and deductions, and show you how you can use a simple online or tax software preparation such as H&R Block Online, to make sure you take advantage of all the credits and deductions you are eligible to claim – guaranteed.
And the best part is, you may even be eligible to use these products for free!
Comparing Tax Credits and Tax Deductions
Some people erroneously use the terms tax credits and tax deductions interchangeably.
They both reduce the amount of taxes you owe, but they do it in different ways.
A Tax Credit is a dollar for dollar reduction of your income tax liability.
A Tax Deduction decreases your taxable income. The value of a tax deduction is equal to the percentage of your highest marginal tax bracket.
Here is an example:
- $1,000 Tax Credit: A $1,000 tax credit directly reduces the amount of taxes you owe by $1,000.
- $1,000 Tax Deduction: Assuming you are in the 25% tax bracket, a $1,000 tax deduction reduces the amount of taxes you owe by $250 (25% of $1,000).
How to Apply Tax Credits and Tax Deductions:
You must first calculate your tax liability before you can apply for tax credits since they are a dollar for dollar reduction on your tax liability. Tax deductions work to reduce your taxable income. Together, tax deductions and tax credits work to reduce the amount of taxes you pay.
Tax credits are often considered more valuable than tax deductions since they are a dollar for dollar reduction in the amount of taxes you owe. Some tax credits are even refundable, meaning you will still receive the tax credit, even if your tax liability is zero.
Bottom line: Tax credits and deductions are both extremely valuable and you don’t want to miss out on any of them!
Common Tax Credits
Here are a few common tax credits, and how you may qualify for them:
- Earned Income Tax Credit (EITC) – Benefits low-income, working families. Learn more at H&R Block (See note below)*
- Child Tax Credit – A tax credit for having one or more qualifying children and income within a certain range. Can be both nonrefundable and refundable.
- Child and Dependent Care Tax Credit – A tax credit for the costs of care for a qualifying individual to allow you to work or look for work.
- Adoption Credit – A nonrefundable tax credit for qualified adoption expenses paid to adopt an eligible child.
- Education Tax Credits – Lifetime Learning Credit and American Opportunity Tax Credit
- Savers Tax Credit – A retirement savings credit for low- and moderate-income workers
*The EITC is not claimed by 1 in 5 eligible taxpayers. This is a refundable tax credit, which means you will receive the full amount if you are eligible, even if you don’t owe any federal taxes. Make sure you don’t miss out on this valuable benefit!
Qualifying for these various tax credits depends on many factors, often including your income, Adjusted Gross Income (AGI), number of dependents, and certain related activities throughout the year, such as retirement savings, education expenses, business activities, and more.
Covering each of these credits in detail would take a lot of space – indeed, the Federal Tax Code is thousands of pages long!
Thankfully, you can use a simple tax preparation program to help you determine your eligibility and claim the credit if you qualify. Check out H&R Block’s MoreZero to get started for free.
Tax Deductions – Should You Take the Standard Deduction or Itemize?
In addition to the tax credits listed above, you can also apply tax deductions to your tax return.
The IRS allows individuals to claim either a standard deduction or itemized deductions. You can only claim one or the other. It’s a good idea to run the numbers for both situations, and take the deduction that offers you the greatest benefit. (don’t worry, you can automatically compare both deductions when you use a program such as H&R Block Online).
The amount of the standard deduction varies depending on your tax filing status, such as Single ($6,350), Head of Household ($9,350), Married Filing Jointly ($12,700), Married Filing Separately ($6,350), etc.
Next, list all potential itemized deductions. Add them together and determine if they are greater than the Standard Deduction. If so, you should claim the itemized deductions.
It sounds complicated on paper (and it can be if you try to do it by hand). But tax preparation products such as H&R Block Online, makes finding and calculating your tax deductions a simple process. H&R Block Online even guarantees the maximum tax refund.
Common Tax Deductions
Some tax deductions are available to everyone, while other deductions may only be available if you itemize your taxes. In addition, some tax deductions may be limited based on your Adjusted Gross Income (AGI) or if you are subjected to the Alternative Minimum Tax (AMT).
For example, the expense may need to exceed a percentage of your AGI to qualify as an itemized deduction. Some tax deductions may even phase out once your AGI reaches a certain amount, based on your filing status.
This is where tax preparation software comes in handy. The software will help you identify potential tax deductions, then calculate whether its better to take the standard deduction(s) or itemize your deductions. These calculations are automatic and help you get the highest tax refund possible.
Here are some common tax deductions available during the 2017 tax-filing season (Note: recent changes to the tax law may result in some changes for the 2018 tax season. This information is current at the time of publication).
- SALT Taxes or State Sales Tax paid (see below for explanation)*.
- Charitable Gifts
- Retirement account Contributions
- Real Estate Property Taxes
- Home Mortgage Interest
- Student Loan Interest
- Educator Expenses
- Health Savings Account (HSA) contributions
- Unreimbursed Medical Expenses exceeding 10% of AGI
*SALT or Sales Tax: SALT means State and Local income Taxes. The IRS allows taxpayers to deduct real estate taxes and either state and local income taxes paid, or the amount of sales tax they paid. It’s a good idea to calculate the amount of sales taxes you paid if you made a series of major purchases during the tax year. In addition, recent changes in tax laws cap SALT deductions to $10,000 per yar.
Qualifying for various tax deductions: Like tax credits, many of these deductions have strict eligibility requirements. You can calculate these by hand, but it’s much easier to use a tax product such as H&R Block.
H&R Block offers multiple versions to meet just about any need. They offer an online version and a version you can download for either Windows or Mac. These tax preparation products are powerful enough and easy enough to use that you can even file your tax return from your smartphone or tablet. Check out H&R Block’s Tax Prep App here.
The Best Way to Maximize Tax Credits and Deductions
As you can see, the IRS offers taxpayers many tax credits and deductions. But they don’t apply to everyone. That is why it’s a good idea to familiarize yourself with them. Having a working knowledge of the available credits and deductions will help you make sure you gather the appropriate forms, receipts, and other records in order to claim these credits and deductions.
Because each tax situation is unique, I recommend using a tax preparation product to file your taxes.
Using a tax prep software program like H&R Block will guide you through a step-by-step interview process to make sure you don’t miss any potential sources of income, tax credits or deductions, or other relevant information.
To top it off, H&R Block has audit protection and guarantees 100% accuracy, and guarantees a maximum refund. So you can rest easy knowing your tax return is as good as it’s going to get. And if you qualify for H&R Block More Zero*, your tax return may be free to file.
You can’t beat free!
- H&R Block MoreZero – free
- Deluxe Online Tax Filing – starting at $34.99 (Best for Homeowners and Deductions)
- Self-Employed Online Tax Filing – starting at $74.99 (Best for Investors and Rental Property Owners)
The best plan for your needs will depend on your overall tax situation. Compare all H&R Block plans to learn more!