As tax season approaches, many of us scramble to gather receipts and documents, often missing out on key ways to save money. Tax deductions and credits are the IRS’s way of offering you a financial break, but they’re only beneficial if you know they exist and how to claim them. In this guide, we’ll explore various tax laws and highlight some frequently-overlooked deductions. 

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State Sales Tax Deductions

It’s common knowledge that you can dedicate state income taxes on your federal return, but many taxpayers are unaware that if you live in a state with no income tax, the IRS allows you to deduct state sales taxes instead. This can be particularly valuable if you’ve made large purchases throughout the year. You can calculate your deduction using the tables here. 

For example, consider John, who lives in Florida. Say he bought a new boat last year for $50,000. Since Florida’s state sales tax rate is 6%, he would calculate his tax deduction as follows:

Purchase price x sales tax rate = sales tax paid

$50,000 x .06 = $3,000

John should compare his total itemized deductions (including the sales tax deduction) with the standard deduction to see which option is more beneficial. 

Charitable Contributions

Giving to charity isn’t just a nice thing to do, it can also save you money when tax season rolls around. We tend to think of charitable donations as large monetary gifts, but the little things count too. For example, if you’ve donated goods to a thrift store, driven your car for charitable purposes, or even hosted a fundraiser, you may be able to claim these expenses as tax deductions. 

Americans are giving to charity at the lowest level in almost 30 years, donating just 1.7% of their personal disposable income to charity in 2022. Many are missing out on valuable tax opportunities. If you have the means to do so, consider donating—even if just a small amount—to your favorite cause. 

Tax Deduction for Education Credits

Education credits like the American Opportunity Tax Credit (AOTC) offer substantial savings to those who qualify. The AOTC allows for a maximum annual credit of $2,500 per eligible student. If the credit pays off your tax balance in full, you can get up to 40% or $1,000 refunded to you. To be eligible for the AOTC, you must:

  • Be pursuing a degree or other recognized education credential
  • Be enrolled at least half-time for at least one academic period beginning in the tax year
  • Not have finished the first four years of higher education at the beginning of the tax year
  • Not have claimed the AOTC or the former Hope credit for more than four tax years
  • Not have a felony drug conviction at the end of the tax year

The Lifelong Learning Credit (LLC) is another great tax deduction. It’s available to eligible students and can help pay for undergraduate, graduate, and professional degree courses. The LLC is worth up to $2,000 per tax return and there is no limit on the number of years you can claim it. 

To be eligible for this credit, you, your dependent, or another third party must pay qualified education expenses for higher ed. You must also pay the education expenses for an eligible student enrolled at an eligible educational institution, with the “eligible student” being yourself, your spouse, or a dependent listed on your tax return.

Student Loan Interest

You may be able to deduct up to $2,500 in student loan interest paid during the year, even if you don’t itemize deductions. This tax deduction is gradually reduced or eliminated for higher income earners, but it can be a major tax break for recent grads starting their careers.

Tax Deduction for Medical Expenses

Medical expenses can be a big financial burden, but they can also offer you a tax deduction if they exceed a certain percentage of your adjusted gross income. You can include the cost of treatments, surgeries, dental and vision care, prescription medications, and some health insurance premiums. Check here to see what other expenses qualify. 

Health Savings Account (HSA) Contributions

If you have a high-deductible health plan, your contributions to an HSA are tax-deductible. The money in your HSA rolls over year to year, and you can use it tax-free for qualified medical expenses. This is a smart way to save for future health-related costs and build wealth in general. 

Energy-Efficient Home Improvements

Going green can save you some green when it comes to your tax bill. Through 2032, federal income tax credits are available to homeowners. They will cover 30% of home improvement costs, or up to $2,000, and can be paired with credits up to $1,200, offering $3,200 in total.

Never Stop Looking for Tax Deductions

Let’s face it, no one really looks forward to tax season, but with a few tips and tricks, you can significantly reduce the amount you owe. Be sure to do your research to make sure you’re taking advantage of any and all tax credit opportunities available to you.

 

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