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With a new federal tax bill on the horizon, you may be wondering how changes to tax brackets, the standard deduction, and itemized deductions will affect you. But you can breathe easy—the important thing to keep in mind as you’re tackling 2017’s taxes is that the vast majority of changes will not go into effect until next tax season.
For now, it’s time to focus on the tax deductions and credits you can take advantage of today and set yourself up for next year’s taxes too—because if there’s anything worse than paying taxes, it’s paying more taxes than you have to!
Last year, an estimated $270 million in tax credits went unclaimed in Washington state alone.(1) That’s $270 million that taxpayers handed over without even knowing it. They missed out on taking advantage of the 19 tax credits that could’ve potentially kept their money where it belonged—in their pockets.
Don’t be among the taxpayers who overpaid because they missed out on the tax credits and deductions they were eligible for. Just a few easy tax deductions or credits can have a big impact, so let’s take a closer look!
Related: Overwhelmed by tax preparation? Use a tax expert and skip the stress.
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How Do Tax Exemptions, Credits and Deductions Work?
While tax exemptions, deductions and credits all help you save on taxes, they each work a little differently. Here’s a quick summary on how they break down for this tax season:
Tax exemptions are determined by how many dependents you’re financially responsible for—whether it’s yourself, your children, your spouse or an elderly parent. As long as your income is below $384,000 as a single person or $436,300 as a married couple, you can get up to $4,050 knocked off of your taxable income for each dependent you claim.(2) Under the new tax code, personal exemptions are eliminated—but you can still take advantage of them when you file your 2017 taxes.
Tax credits cut your taxes dollar for dollar, so a $100 tax credit cuts your tax bill by $100. Even if you don’t owe taxes, you can still be eligible for a tax credit.
Tax credits fall into two main categories: refundable and nonrefundable. If you have a refundable tax credit of $500 but only owe $200 in taxes, the IRS will send you a check for $300. On the other hand, if you have a nonrefundable tax credit worth $750, but only owe $250 in taxes, unfortunately you won’t get a check for $500 (the balance of the credit you didn’t use).
Tax deductions lower your taxable income—potentially reducing (or even eliminating) any taxes you may owe. You may have heard that the standard deduction is doubling under the new tax bill. Or you may be wondering if this would be a good year to itemize your taxes. Or you might be completely confused about what to do next!
But, before you tackle your taxes, the first step is to understand the difference between the types of deductions— so you can decide which option works best for you this year.
- The standard deduction is essentially a tax freebie, if you choose not to itemize your deductions. Depending on your filing status, the standard deduction reduces your adjusted gross income by a preset amount, lowering the amount of taxes you have to pay. For example, if you’re single and you make $46,500 a year, you only need to pay taxes on $40,150 of that income if you take the $6,350 standard deduction.(3)
|Filing Status||Standard Deduction|
|Head of Household||$9,350|
|Married Filing Separately||$6,350|
|Married Filing Jointly||$12,700|
Important to note: If you or your spouse are over 65 or legally blind, or if you’ve been affected be a federally declared disaster, you may qualify for a larger standard deduction. But if you’re claimed as a dependent on someone else’s return, married but are filing separately, or a nonresident alien or a dual-status alien, your standard deduction may be lower.
Outside of the standard deduction, there are two other ways to lower your taxes: above-the-line adjustments and itemized deductions.
Above-the-line adjustments can lower your adjusted gross income. As a bonus, you can claim them (as long as you qualify) whether you choose the standard deduction or itemize your deductions.
Examples: student loan interest, educator expenses, some retirement plan contributions, HSA premiums, moving expenses, and tuition.
Itemized (or “below-the-line”) tax deductions offer the potential to get an even bigger tax break than the standard deduction—if you have enough eligible expenses.
Once those expenses exceed a percentage of your income, they can be deducted from your taxable income—which will save you money in taxes that you’d normally need to pay. We’ll cover how to decide whether to itemize or take the standard deduction in the next section.
Examples: mortgage interest, state income tax, local sales tax, real estate tax, natural disaster losses, medical expenses, unreimbursed employer expenses, and charitable donations.
Not sure if you should self-file or see a tax pro? Take our quiz to find out!
Itemizing vs. the Standard Deduction
Depending on your filing status, you can automatically subtract up to $12,700 from your taxable income by taking the standard deduction. Fast. Easy. Done. Right?
Itemizing your deductions may be more of a hassle, but taking the easy way doesn’t always pay off! Especially since the standard deduction is doubling next tax season, you may want to consider itemizing this year. Take Jennifer and Mark for example. Because they’re married and filing jointly, they qualify for a $12,700 standard deduction—nothing to sneeze at!
But what if Jennifer and Mark itemized their deductions—would they save money? By factoring in just three itemized deduction examples (medical expenses, mortgage interest, and charitable donations) they can knock nearly $20,000 off their taxable income, potentially saving them thousands of dollars on their taxes.
But itemizing isn’t always the best way to go. Take Robert for example: He’s single and working his way through his debt snowball by putting in extra hours at his accounting job and renting a studio apartment. For him, the standard deduction offers the biggest tax break—over $2,000 more than if he were to itemize.
So when should you itemize deductions like Jennifer and Mark did? If you’re a homeowner, run your own business, have made generous charitable contributions, paid out-of-pocket for hefty medical expenses, or have suffered substantial loss that was uninsured, itemizing may be the best move for you.
The bottom line? When in doubt, turn to a tax advisor. With years of experience behind them, their wealth of knowledge can take the guesswork out of taxes and prepare your withholdings for next year—protecting you and your wallet.
Contact a trusted tax professional that Dave recommends to see what’s the right move for your unique situation.
Don’t Miss These Easy Tax Deductions and Credits
Here are just a few of the commonly overlooked personal tax deductions and credits that could end up saving you thousands on your taxes – and are all still relevant for filing your 2017 taxes. Keep in mind that taking the standard deduction offered by the IRS may affect your ability to benefit from these.
Easy Tax Deductions:
If you’re a homeowner, you can choose from three easy tax deductions to maximize your savings: the interest you paid on your mortgage, your mortgage insurance premiums (also known as private mortgage insurance), and any state or local real estate taxes you paid on your property.
Tax Pro-Tip: If you sold a home this year, don’t forget to include the real estate taxes you paid when you closed on the sale of that property.
State and Local Sales Tax
The IRS allows you to deduct the taxes you paid—state income taxes or state and/or local sales taxes, along with some foreign taxes. If you live in a state without a state income tax, the sales tax deduction is the way to go. This is a really easy tax deduction that a lot of Americans don’t know to take advantage of!
Charitable Giving (must itemize deductions to claim these)
As long as you’re giving to a charity approved by the IRS, you can deduct up to 50% of your income through donations. And it doesn’t have to be limited to writing a check or donating clothes your kids have outgrown. You could deduct everything from the cost of the ingredients it took to make your mom’s famous chicken soup for your local homeless shelter to the mileage you put on your car to get there (up to 14 cents per mile). You could even deduct the amount you paid a neighbor to watch your kids while you dropped the meal off.
Tax Pro-Tip: If you’re making a donation valued at $250 or more, you’ll need written acknowledgement from the organization.(4)
Medical and Dental
Have health insurance but still find yourself paying out-of-pocket for medical or dental expenses? Once they exceed 10% of your adjusted gross income (AGI) you can deduct things like long-term care costs, chiropractor visits, and that swimming pool you put in the backyard per doctor’s orders.(5)
To break it down: If your adjusted gross income is $45,000 and you have $6,000 of medical expenses that weren’t covered by your health insurance, you can write off $1,500 as a tax deduction.
Retirement and Investing
Contributions to your 401(k) aren’t tax deductible, but they will lower the amount of your taxable income, potentially moving you to a lower tax bracket and saving you money. If you happen to have a traditional IRA instead of a Roth IRA, contributions are tax deductible up to a certain limit.
Teachers who are paying out-of-pocket for classroom supplies can deduct up to $250 (or up to $500 if you’re married and both of you are educators).
Working on paying off your, your spouse’s, or your child’s student loans? You may be able to deduct up to $2,500 of the loan’s interest you’ve paid for yourself, your spouse, or your child.(6)
Job Hunt Expenses
First-time job hunters are not eligible for this tax deduction, but if you’re looking for a new job in your current field, you may be able to deduct things like travel expenses for interviews, employment agency fees, or even the cost of hiring a top-notch editor to polish up your resume.
Child Care or Dependent Care
If you’re caring for a parent, expenditures like medical supplies, in-home care or nursing home costs may be tax deductible if they qualify as a dependent.
Certain legal fees like hiring a tax pro, securing an attorney to obtain alimony payments, or legal fees associated with an adoption can be deducted once they exceed 2% of your adjusted gross income.
Jury Duty Pay
If you handed over your jury duty pay to your employer because they paid your salary while you served, your jury duty pay can be deducted from your taxable income.
If you experienced a loss due to theft or a disaster that wasn’t covered by insurance, you may not be completely out of luck at tax time. Those unreimbursed losses can be claimed as itemized deductions by following IRS guidelines.(7) Since this is a complicated and uncommon deduction, be sure to work with a tax pro to get it done right.
Have a hobby that’s costing you more revenue than you’re bringing in? Save yourself from paying taxes on hobby income by deducting your expenses from that revenue to break even. Better yet? Instead of complicating your taxes, create a plan to turn that hobby you love into a business that can generate additional income so you can bring in a profit while you’re having fun.
If you paid a fee to host your wedding at a nonprofit, like a church or a historical site, you can write that fee off as a charitable contribution. Congratulations!
Do you pay the kids a fair wage to help out with your landscaping business, or have you hired them to help you bake cupcakes for your catering company? You can deduct their salaries from your company’s income while potentially moving you to a lower tax bracket.
Can’t-Miss Tax Credits:
Earned Income Tax Credit (refundable)
Workers with low to moderate income may be able to take advantage of the Earned Income Tax Credit (or EITC/ETC)—a refundable credit ranging from $510 to $6,318 that you can claim even if you’re not required to file a tax return.(8) If you’re self-employed, live in a rural area, have grandkids you’re raising, are recently divorced or unemployed, or are receiving disability benefits, this credit may be one you need to look into.
Child Tax Credit (nonrefundable)
Have a child who’s under 17 who has lived with you for more than half of the year? Assuming you meet all seven requirements for the Child Tax Credit, you can cut your tax bill by as much as $1,000 per child.(9) You may have heard that under the new tax bill – this gets even better for families. The child tax credit expands to $2,000 per child – and has a refundable portion up to $1,400.
Child and Dependent Care Credit (nonrefundable)
If you have a child under 13 and need child care because you’re working or looking for work, you may be able to claim the Child and Dependent Care Tax Credit—up to $3,000 of expenses for one child or $6,000 for two or more. This may also help you if you’re caring for an adult dependent who has a physical or mental disability, as long as they’ve lived with you for more than half the year.(10)
If you’ve adopted a child this year, you could receive a tax credit for adoption fees, home study costs, court costs and attorney fees—and even traveling expenses related to the adoption—up to $13,570 per child. Though the adoption credit is nonrefundable, you can carry any unused portion of your credit forward to lower your taxes for up to five years.(11)
American Opportunity Credit (partially refundable)
As long as you’re a college student with a modified adjusted gross income of no more than $80,000 as a single person or $160,000 as a married couple, you could qualify for the American Opportunity Tax Credit. This education-focused credit covers 100% of your first $2,000 of eligible expenses, maxing out at $2,500 per year for up to four years.(12)
Lifetime Learning Credits (nonrefundable)
Offering a max yearly coverage of $2,000—20% of the first $10,000 of eligible expenses—the Lifetime Learning Credit may be slightly less than the American Opportunity Credit, but it’s also available to a much wider audience.(13) If you don’t qualify for the American Opportunity Credit but are looking at continuing your education, this tax credit may be for you!
Saver’s Credit (nonrefundable)
Need some incentive to stash cash away for the future? If you’re contributing to a retirement plan and your income isn’t over $31,000 as a single or $62,000 as a married couple, you may qualify for up to a $2,000 credit as a single person or $4,000 as a couple.(14)
Elderly or Disabled Credit (nonrefundable)
If you’re 65 or older, you may qualify for a credit that could reduce your taxes between $3,750 to $7,500 if you’re retired or on permanent disability.(15)
Related: Tax preparation doesn’t have to be a pain. Save time and reduce hassle by gathering the right paperwork the first time around. Download your free tax preparation checklist.
Maximize Your Refund With an Expert Tax Consultant
Want to be sure you’re getting the most out of all these tax deductions? If you see a deduction you forgot to claim on last year’s income taxes, you can amend tax returns for up to three years after the original filing date—so you can go all the way back to 2014 and check for any money you missed.
Whether you need to amend past returns or simply want to be thorough when you file this year’s taxes, a tax professional can give you the guidance you need to claim every exemption, deduction and credit you qualify for. Even better, they can help you plan ahead for next year’s taxes.
Don’t miss out on potential savings you’ve earned throughout the year. Just one missed deduction could cost you far more than the fee of a professional. Save yourself time and money by getting your taxes done right the first time. Contact one of Dave’s recommended tax specialists today