Are you ready to file your federal tax returns? It is interesting to know that there are certain tax benefits that the taxpayers can avail. These benefits are in the form of tax deductions and tax credits. Although most taxpayers may be aware of these benefits, there are a few that might have skipped your sight. Here is a rundown of the basic tax benefits and deductions that you can avail.
Tax deductions and tax credits
Taxpayers may come across certain terms, such as tax deductions and tax credits, when they start the process of filing their taxes. When it comes to tax deductions, the exclusions reduce the taxable income and their final value depends on the marginal tax rate of the taxpayer. The marginal tax rate increases with the rise in the income.
Moreover, tax credit helps in reducing the taxes directly. These credits do not depend on the tax rates. However, the credit’s value may depend on the basic tax liability of the taxpayer. It is also interesting to note that nonrefundable credits can bring down the tax to zero. Similarly, any tax credit beyond that is lost. Most of the tax credits are nonrefundable, which means that credit cannot cut the tax liability below zero. Therefore, income filers from the low-income brackets do not often receive the full benefit of the tax credits. So, for instance, a family who has no income tax liability cannot benefit from nonrefundable tax credits.
Other tax credits are fully or partially refundable. This means that if the value exceeds the individual’s tax liability, then the excess amount is paid to the income tax filer.
Tax benefits of education expenditures
Taxpayers can benefit from savings plans, tax deductions, and tax credits from higher education expenditures.
Who can claim for an education credit?
Although there are different criteria for availing each of the credits; however, to avail any, you need to meet all of the below-mentioned requirements.
- You, your dependent, or a third party pays for qualified education expenditures for a higher education
- A student must be enrolled at an eligible educational institute
- The student enrolled should either be you, your spouse, or a dependent that you have mentioned on your tax return form
Let us take a look at some of the deductions under education
- Tuition and fees deduction
- Student loan interest deduction
- Qualified student loan
- Qualified education expenditures
- Qualifying work-related education
- Education to improve or maintain skills
- Education required by law or employer
Tax benefits of homeownership
One of the main benefits of homeownership is that the credited rental amount or income does not fall under the taxable income. However, the homeowners would still deduct property tax payments and mortgage interest along with some other expenditures from the taxable income. Moreover, homeowners can eliminate, up to a certain limit, the capital gain from the sale of the house. All these tax benefits are more useful to individuals who fall under the high-income brackets than the ones in the lower income brackets. The tax benefits and deductions under homeownership include the following:
- Property tax deduction
- Imputed rent
- Profits from home sales
There is an option of deducting sales tax from the federal income tax. This can help save money in the states that do not have its own income tax guidelines. One needs to itemize to claim the deduction; however, in case of doubt, you can refer to the official website of the Internal Revenue Services (IRS) to know more about saving on the big purchases made.
Health insurance premiums
Medical expenses can be itemized for a tax deduction if you have mentioned them while filing your tax returns. The deductible medical expenses need to exceed 7.5% of the gross income for you to claim for the tax benefit.
Moreover, if you are self-employed and pay for your own medical expenses, then you can also claim for 100% of the premium paid. This amount gets deducted directly from your gross income and not considered as an itemized exclusion.
Out-of-pocket expenses can help you with tax benefits if you make the most of this benefit. For instance, if you organize an art exhibition and use the income received to fund a charity organization, you can deduct the cost of paintings and other miscellaneous expenses used. It can be helpful to save the receipts and itemize them during your tax audit.
One of the main tax benefits that you can avail is through investments. These include a sale of a home, capital losses, individual retirement agreements, etc.
Some other tax benefits include
- Paying the babysitter
- Lifetime learning
- Unforeseen business expenses
- Self-employed social security
If you are unable to find your tax benefits criteria here, you can visit the official website of the IRS and find the complete list of the tax benefits, deductions, and credits.