When it comes to claiming deductions on your taxes, chances are you’re familiar with standard deductions, or even itemizing, but you may not be familiar with some other tax-deductible items. Items like claiming spouses or dependents and writing off business expenses are go-to deductions, but here are a few other items that can be claimed on income taxes to save you money or decrease your tax obligation to the IRS.
The Ins and Outs of Above-the-Line Deductions
Itemizing seems like a daunting prospect at tax time, which leads many taxpayers to simply go with standard deductions, but, did you know there are some deductions beyond standard that you can claim without itemizing? Known as above-the-line deductions, these are tax-deductible items that you’re able to claim on your taxes – even if you don’t or can’t itemize. Above-the-line deductions are the expenses that are subtracted from your gross income to determine your adjusted gross income, or AGI. Found on Forms 1040 or 1040a, lines 23-36, above-the-line deductions get their name because they’re deducted on page one of these forms, just above the line where your AGI is calculated.
Above-the-line deductions directly reduce your adjusted gross income which typically results in a lower tax bill – the less taxable income you have, the less you’ll owe Uncle Sam. Also known as adjustments to income, above-the-line deductions range from educator and moving expenses to alimony payments. Some of these deductions require you or your tax preparer to file additional IRS forms in order for you to claim them. If you’re unsure which adjustments to income you can claim, a quick search of the IRS’ website, or consultation with a tax professional, will provide you all the guidance you need.
Making the Most of Standard Deductions
When determining whether you should claim standard deductions or itemize, the IRS recommends running both scenarios to see which provides you with the most tax benefit. While itemizing is a must for some people, three out of four middle-class taxpayers opt to go with standard deductions. Standard deductions are a set dollar amount adjusted for inflation that reduce the amount of income on which you’re taxed. Your age, income and filing status – single, married filing jointly, married filing separately, qualifying widow/er with a dependent child or head of household – determine which standard deductions you can claim.
Every year the IRS releases new income thresholds for standard deductions, and the following figures are for the 2017 tax year. If you file as head of household, your standard deduction for 2017 is $9,350. Single wage earners, or married couples filing separately, may take a standard deduction of $6,350. Married couples filing jointly, as well as qualifying widow/ers, can claim a standard deduction of $12,700. The IRS also offers additional standard deductions that you can claim on top of your standard deductions. Taxpayers over 65, those who are legally blind or those who have suffered loss from a federally declared disaster can claim increased standard deductions ranging from $1,250 to $2,500 depending on eligibility and filing status.
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Claiming Personal and Dependent Exemptions
In addition to standard deductions, taxpayers can claim exemptions for themselves, their spouse and any qualifying dependents. For tax year 2017, you're able to claim $4,050 per person in exemptions. Every person can be claimed on only one return, so any dependents cannot claim a personal exemption for themselves if they are claimed as a dependent on someone else's tax return.
Spouses are never considered dependents, however you may claim one exemption for your spouse, given that certain criteria are met. If you're filing jointly, you may claim yourself and your spouse as well as any qualifying dependents. Single filers can claim an exemption for a spouse as long as the spouse is not filing his own return, is not claimed as a dependent on anyone else's return and has no income of his own. Once you reach a certain adjusted gross income, the amount of these exemptions eventually phases out. Visit the IRS' website for more information on current phase-out limits.
When Should You Itemize?
Some taxpayers, like non-resident aliens or married individuals filing separately with an itemizing spouse, cannot take standard deductions; therefore, they must itemize deductions on their tax returns. The IRS suggests itemizing your deductions if your qualifying itemized deductions are greater than your standard deductions.
Schedule A deductions include items such as local income or sales tax, any real estate or property taxes and mortgage interest as well as any losses you suffered due to disaster. (Note that self-employed taxpayers write off deductions related to a business on a Schedule C; these are not "itemized" deductions.)
Charitable contributions, medical, dental and nonreimbursed work-related expenses are other commonly itemized Schedule A deductions. However, the list of items you are able to deduct is quite extensive, and each has its own eligibility requirements or limitations, so be sure to understand the rules. When deciding to itemize, be sure to keep an accurate accounting of your affairs and any supporting documentation, such as receipts, bank statements, paycheck stubs or invoices. In the event you are later audited, you will need to show proof to the IRS that these itemized deductions are indeed legitimate and valid.
Self-Employed Schedule C Deductions
Self-employed or freelancing taxpayers are able to claim their business expenses on Schedule C. Because so many of the expenses incurred during the course of conducting business can be written off, it is a good idea to consult with the IRS’ website and a qualified tax professional to assist you in finding which deductions you are eligible for. Here is a short list of possible deductions to get you started.
Schedule C Deductions:
- Advertising costs
- Continuing education needed for your work
- Vehicle maintenance and operating costs
- Depreciation of equipment needed to conduct business such as furniture or hardware
- Travel, incidentals, food, entertainment and other costs incurred while traveling for work
- Home office upkeep
- Bad debts
- Fees paid for processing credit card transactions
- Business-related gifts to contractors or clients
- Membership dues paid to professional organizations
- Wages or fees paid to employees
- Legal or professional services needed
Using Tax Credits
Tax credits differ from deductions in that they are a dollar-for-dollar reduction of your tax obligation to the IRS. For example, if you owe $2,500 in taxes and receive a $1,500 tax credit, you will owe the IRS only $1,000 in taxes. Tax credits are either refundable or non-refundable. Non-refundable tax credits can reduce your tax bill to zero (given certain circumstances), but you cannot keep the difference. This means, if you have a tax bill of $500, and you qualify for a $1,000 tax credit, you will not receive the difference in the form of a refund. Refundable tax credits are the opposite. If your tax obligation falls to zero, and you have claimed a refundable tax credit, you may be able to pocket the difference as a refund.
A lesser-used, refundable tax credit is the earned income tax credit. Also known as the EITC, the earned income tax credit is a credit designed to help shoulder some of the burden for low-to-moderate-income wage earners. In a given tax year, only 80 percent of eligible taxpayers actually claim this substantial tax credit. Eligibility is determined by income, age, filing status and any investment income you may have. You do not need to have a qualifying child to be eligible for the EITC, but taxpayers with children receive a higher credit, up to $6,318, for three or more children.
If you do have children, then the child tax credit can reduce the amount of taxes you have by up to $1,000 per child. In order to qualify for the child tax credit, both you and your child must meet seven requirements known as tests. These tests include age, income, residency, how much support is provided, if the child is a dependent of yours, citizenship status and your relation to the child. The child tax credit is non-refundable, however, by completing Form 8812, you may be eligible to claim an additional child tax credit for the unused portion of this credit if your tax obligation is reduced to zero.
To help taxpayers and families with premiums for health insurance purchased on the Health Insurance Marketplace, the IRS offers the premium tax credit. Also known as PTC, the premium tax credit is a refundable tax credit based on income and other eligibility requirements. Generally, the lower your income, the higher your PTC. If you qualify for the premium tax credit, you may also be eligible for advance payments of the PTC, also known as advance credit payments. These advance credit payments are paid directly to your insurance company, on your behalf, to lower upfront and out-of-pocket expenses associated with obtaining healthcare coverage.
When it comes to the list of items that can be claimed on income taxes, the choices are many. Unfortunately, numerous taxpayers are unaware of these deductions and credits, and often let them go unclaimed. These deductions and credits not only lower your tax obligation, or the amount you owe, but you may even receive a refund. Familiarizing yourself with the items that can be claimed on income taxes, and consulting with a qualified tax preparer, will help save you time and money as well as ensure you’re taking full advantage of all the deductions and tax credits you qualify for.
- Investopedia: Increase Your Tax Refund With Above-The-Line Deductions
- Bankrate: How to Cut Taxes Without Itemizing
- TurboTax: 9 Things You Didn't Know Were Tax Deductions
- Forbes: IRS Announces 2017 Tax Rates, Standard Deductions, Exemption Amounts And More
- TurboTax: What is a personal exemption?
- IRS: Topic Number: 501 – Should I Itemize?
- The Balance: Making Itemized Deductions on 1040 Schedule A
- Efile: Do I Qualify for the Earned Income Tax Credit (EITC)?
- TurboTax: 7 Requirements for the Child Tax Credit
- IRS: The Premium Tax Credit – The Basics
- TurboTax: Reporting Self-Employment Business Income and Deductions
- H&R Block: Schedule A – Itemized Deductions
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