The IRS offers more than $1 trillion in tax deductions. You need to take advantage of that and claim your share. When filing your tax returns, sometimes it is better to itemize your deductions instead of taking the standard deduction. Why? When you itemize the deductions, the total amount may be more than the standard deduction. The only problem is that many people overlook many tax deductions. Read on to learn most overlooked tax deductions and credits, and how you should take advantage of them to reduce your tax bill.
Credit for Dependents
You are familiar with Child Tax Credit that gives you up to $2,000 tax credit. If you have been supporting a dependent who doesn’t qualify for child tax credit, you can claim them through Child and Dependent Care Tax Credit. You can claim up to $3,000 in dependent care expenses for qualified dependent/child. You can also claim older persons or disabled persons you are supporting financially at your home. Many people overlook this credit and it can reduce your tax bill dollar for dollar, hence it’s a good deal to reduce your tax liabilities. However, the dependent tax credit phases out for individuals earning a gross income of more than $200,000 and $400,000 for married couple filing jointly.
Social security taxes you pay
If you are self-employed, you can take advantage of social security taxes you pay. Taxpayers are supposed to pay 15.3%, but employed individuals pay half while the employer pays the other half. Therefore, employee can deduct half when filing their tax returns. For a self-employed individual like you, you pay full 15.3%. When filing your taxes, you should write off half of what you pay and include the other half in your tax returns. The good thing about this deduction is that you don’t have to itemize to benefit from it.
Home improvement deductions
When you make significant improvements in your home, you can claim home improvement tax deduction as a percentage of the total cost of the installation. For instance, when you install a solar panel system to provide energy for your home, you can claim up to 30% energy tax credit of the total cost of the project, including labor costs. The solar panels must meet the set specifications to qualify. You can also claim home improvements made for medical reasons such as modified bathrooms, entrance ramps, handrails, and more. Other improvements that qualify include fuel cells, geothermal heat pumps, wind turbines, and other green energy installations.
Out of pocket charity donations
Besides taking advantage of home improvement tax deduction, consider all out-of-pocket charitable donations you made for the financial year to lower your tax bill. Many people don’t consider this as an essential deduction but it can reduce your taxable income and tax liabilities in the end. You can significantly reduce your taxable income by taking advantage of all donations you made, especially in cash or check. You need to have receipts or written records to show you made the contributions to the recipient organization. You have to be careful when handling this as it can raise a red flag when you claim more that you actually donated. If you raise suspicions, the IRS may call for an audit on your company, and that is not a good thing.
When preparing your taxes, you need to be smart and careful at the same time. Being smart will help you claim all deductions and credits you qualify for, without overlooking anything. That way, you will reduce your tax bill or increase your tax refund. You’ve to be careful not to make mistakes that can lead to errors or raise a red flag.