When preparing your income tax return, there are several tax benefits you can claim to reduce your taxes or to increase your refund. Each of the benefits has specific eligibility requirements that you must satisfy before you can claim them on your return. But by familiarizing yourself with all of the tax-saving opportunities the IRS provides, you may just find some tax deductions and credits that you didn't even know existed.
Adjustments to Income
The first category of deductions you’ll notice on your tax return are the adjustments to income. These are specific types of expenses that the IRS allows you to deduct for purposes of calculating your adjusted gross income (AGI). These deductions are available regardless of whether you itemize your other expenses or claim the standard deduction. The types of adjustments available each year is subject to change, but they typically include the moving costs you incur when relocating for a job, contributions you make to traditional IRA and health savings accounts, the interest payments you make on student loans and alimony payments.
Itemized or Standard Deductions
If you incur other types of expenses that aren’t deductible as adjustments to income, you may want to consider itemizing if you can claim them on a Schedule A form. Some of the expenses you can deduct on Schedule A include your state income or sales tax payments; the contributions of cash and property you make to charities; medical and dental costs that exceed 7.5 percent of your AGI; mortgage interest; and real estate taxes you pay to your local government. However, you should only itemize deductions when the total deduction you calculate on Schedule A yields a bigger deduction than the standard deduction for your filing status. If you aren’t a dependent, the IRS allows you to claim the standard deduction, which is a fixed amount for each filing status. The benefit of the standard deduction is that it doesn’t require additional tax forms or proof that you paid certain expenses. But if you itemize, can save you more in tax, it may be worth the extra time it takes to prepare the Schedule A and any other additional forms that are required.
Personal & Dependent Exemptions
Federal tax law allows you to claim an exemption for yourself, one for your spouse (if you file jointly) and one for each dependent. An exemption works just like a deduction in that it reduces your taxable income, which is the amount of your income that is subject to taxes. And like the standard deduction, exemptions are also fixed in amount but are the same for all filing statuses. It's important to know, however, that exemptions are available for adults as well as your children. To claim an exemption for a child, the IRS requires that you be the parent, grandparent, sibling or one of the other allowable relationships. Each child must be under the age of 19 or under the age of 24 if attending school full-time, reside with you for more than half the tax year and cannot contribute more than half of their own support. However, this doesn’t mean you must be the person providing most of the financial support. For an adult to serve as your dependent, the amount of income they earn that’s reportable on a tax return must be less than the exemption amount for the year and you must provide more than half of the funds necessary to support them. And unless the individual has a certain type of relationship to you, such as your parent, they must also reside with you for the entire tax year.
Every tax year, the IRS offers a number of tax credits that you may be able to claim on your return. Each tax credit covers a specific type of expense and has a number of eligibility requirements. However, unlike a tax deduction that only reduces your taxable income, tax credits reduce the final tax liability you calculate at the end of your return on a dollar-for-dollar basis. Some tax credits -- known as refundable credits -- can even increase your refund if the credit amount you’re eligible for is more than the tax you owe for the year. Some of the tax credits available cover the cost of hiring care providers for your dependents, the cost of adopting a child and for tuition and certain other education-related expenses.
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