Making the Most of Tax Benefits by Using Credits and Deductions

Making the most of your tax credits and deductions is crucial to lowering your income tax. But tax regulations can be complicated, and even tax professionals can overlook opportunities to save money on taxes. Savings can be achieved by itemizing deductions, but only if they surpass the value of the standard deduction. Examples of such deductions include mortgage interest, unreimbursed medical costs, and charitable contributions. Conversely, a credit might immediately reduce your taxes.

1. Health and Dental Costs

The IRS provides tax incentives to help defray the cost of medical or dental care for you or a family member. On your tax return, however, you must itemize your deductions and have receipts. Qualified unreimbursed medical expenses that exceed 7.5% of an individual's adjusted gross income (AGI) are deductible by taxpayers in 2024. All medical and dental expenses, including the price of prescription drugs and dental work, should be kept on file. If a doctor prescribes certain foods for a medical condition, you can also deduct the expense of those foods. But you cannot deduct things like vitamins, dietary supplements, and herbal medicines that do not assist in treating a medical condition that has been diagnosed by a physician. IRS Publication 502, Medical and Dental Expenses (Including the Health Coverage Tax Credit), provides further details on medical and dental costs. For this deduction to be allowed, Schedule A (Form 1040) must be filed.

2. Interest on mortgages

One of the oldest benefits of being a homeowner is being able to deduct a portion of the interest paid on mortgages through the mortgage interest deduction. When filing taxes, homeowners must itemize their deductions in order to get the deduction. You must use the loan proceeds to purchase, construct, or significantly enhance the property in order to be eligible for the deduction. Other conditions include paying off mortgage debt on a primary or secondary dwelling that meets the requirements. You must also have paid a minimum of a 20% down payment on your loan and be legally obligated to repay the amount. The mortgage interest deduction, however, is only helpful if, for your filing status, your itemized deductions exceed the 2024 standard deduction. If not, filing for the deduction might not be worthwhile.

3. Donations to Charities

Giving to charities is a wonderful way to help a cause you care about and may even result in tax savings. For cash donations, you may be eligible to deduct up to 60% of your adjusted gross income and up to 30% if you own long-term appreciated assets like stocks or real estate. You must itemize your deductions on Schedule A in order to claim deductions for charitable contributions. To determine whether itemizing will result in a lower tax burden than using the standard deduction, it is recommended to utilize an application such as TurboTax. Remember to deduct the cost of any perks you obtain in return for your donation, such as tickets or meals. All philanthropic donations should be meticulously documented, along with any receipts or acknowledgements from the recipient organization.

4. Education costs

It pays to stay on top of the many tax benefits available, whether you're saving for your children's college education or providing financial assistance to a loved one for their educational expenses. These may come in the form of credits, deductions, or both. For instance, taxpayers who qualify can deduct income taxes dollar for dollar through the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). In the event that you have no tax obligations for the year, these credits might also be refundable. Tuition and required enrollment fees, course-specific books and materials, student activity fees, equipment or uniforms are all considered qualified expenses. Every school you attend should normally provide you with a 1098-T, or tuition statement, listing all of the qualified expenses.

5. Business Outlays

When tax season rolls around, not having an organized record of your company's outlays can cause cash flow problems and overlooked deductions that have a negative impact on your bottom line. Sorting through your expenses to prepare for taxes doesn't have to be a difficult undertaking, though. Several costs associated with running a small business can be written off, such as petrol, office supplies, computer hardware, software, and legal and professional services. Additionally, utilities associated with a home office that you use solely for business purposes may be deducted as work-related expenses. Early in 2023, when Bench was going over Joe's books, our bookkeeper discovered over $1,500 in contractor expenses that might be written off against taxes. Joe's net self-employment income and total tax obligation were decreased by those savings.