A GUIDE TO INCOME TAX: OVERLOOKED CREDITS AND CUTS
The US tax code changes from time to time, and majority of taxpayers cannot name at least three of the most common deductible expenditures. On that note, here are some of the expenses where people can save a considerable amount.
Child Care Tax Credit
Preschool and after-school costs can greatly reduce the amount of tax you pay. Under the Child Care Tax Credit, a parent can claim a deduction of up to 35% on the first $3,000 in expenses for one child (or $6,000 for two or more children) on the following prerequisites:
- The parent cannot or look for work without childcare
- The child is under age 13, or if older, incapable of taking care of themselves
- The daycare provider meets some other qualifications by the Internal Revenue Service
Many buyers pay upfront points, ranging from 1% to 2% (or higher), to their lender in order to obtain a lower mortgage rate. But they forget these are generally deductible on their tax returns and they only remember to cut the actual mortgage interest itself.
The entire amount paid as points is deductible in the year it was settled, provided the mortgage meets some of the following conditions:
- Points adhere to industry standards (in case it falls short, points are still deductible but it must be disbursed equally over the loan’s lifespan
- Proper documentation
- Home is the buyer’s primary residence
Moving is definitely costly. But taxpayers can subtract move-related expenses from their taxes as long as the move is job-connected. It can still be reduced even if the person has no other deductions and chooses the standard deduction.
Here are the requirements to avail the moving expense deduction:
- Employer does not reimburse your expenses
- New workplace must be at least 50 miles farther from your previous house than past workplace
- Employed full-time in the new position for at least 39 weeks a year after the move
One Half of Self-Employment Tax
Both companies and workers, with certain exceptions, need to contribute 7.65% of an employee’s salaries to the FICA (Social Security and Medicare) system. If you are self-employed, you get both sides of this contribution, or 15.3% of the total income aside from the usual income tax. The IRS enables self-employed individuals to lower one half of the total self-employment tax owed for a given year. It can also be claimed regardless if the taxpayer has no other deductions.
Retirement Savings Contribution Credit
Under the reward system, a person is given a tax credit amounting to 10% to 50% of the amount he contributed to a retirement plan. This could cut the amount owed to the IRS by $500 for each $1,000 contribution. The biggest benefits of this credit are provided to lower income taxpayers. In order to avail the credit, one must make less than the IRS-specified limits, not be a full-time student, and not declared as another person’s dependent on tax return.
State and Local Income / State Tax
The amount of tax paid to your local or state government, upon filing your last income tax, is deductible on the current year’s federal tax return. People tend to miss out this tax credit because they cannot find their records for the correct deduction amount or remember it.
If you have paid significant sales taxes in the past, these may be credited instead of your local and state income taxes. To precisely compute your total sales tax, add all your credit and debit card purchases for the year and subtract out-of-state purchases, and then multiply the result by your sales tax rate.
We shall discuss the common tax filing mistakes in the next session.