If you’re like me, you’d prefer to pay as little as possible in taxes each year. To help you save your hard-earned money, here are 5 commonly overlooked ways to save money at tax time
1. State Sales Tax
Thankfully living in Texas we do not have a state income tax. However, we can deduct Sale Tax as an itemized deduction. The IRS even helps you calculate the state sales tax using its Sales Tax Deduction Calculator. In addition, if you have a large purchase such as a vehicle or a boat, that sales tax is added to the calculated amount you can deduct.
If you are not so fortunate to live in our Great State, then you can choose to deduct either the state income tax you paid or the state sales tax you paid.
2. Non-Cash Charitable Contributions
Most taxpayers know that cash donations to approved charities are deductible if you itemize deductions. However, non-cash donations, such as clothing and/or household goods, are deductible at fair market value. Organizations like The Salvation Army can help you determine the value of your donations. Also, expenses you incur on behalf of a charitable organization are deductible as well. For example, if you purchase supplies like stamps or food for a charitable group, that purchase is deductible. Or, if you incur travel expenses to volunteer at the local soup kitchen, or if you deliver meals on wheels in your car, you can deduct 14 cents per mile driven. You can’t deduct the value of your time spent volunteering, but don’t overlook out-of-pocket expenses. While individual expenses may be small, they can add up. Just make sure you keep a record, along with any associated receipts.
3. Child Care Credit
Most taxpayers know that you can qualify for a tax credit (much better than a deduction) for 20%-35% of what you pay for childcare while you (and your spouse, if filing jointly) work. The maximum benefit is up to $6,000 for two or more children. Many employers offer a child care reimbursement account, enabling the employee to pay for childcare with pre-tax dollars (even better yet). However, those plans are capped at $5,000. If you are paying for child care with pre-tax dollars and exceed the $5,000 cap, you can still claim the credit using up to $1,000 of additional expenses.
4. Tuition and Education Expenses
If you or your dependent(s) are working toward a college degree, you can receive an annual tax credit of up to $2,500 per eligible student for the first four years of higher education through the American Opportunity Tax Credit. But, even if you are simply taking a class or two to improve job skills, you may qualify for a credit of up to $2,000 per tax return through the Lifetime Learning Credit. And, there is no limit on the number of years you can claim the Lifetime Learning Credit. But, there’s no double dipping – you can only choose one type of education tax credit per year. These credits phase out based on your level of income – check IRS Publication 970 for further details.
5. Student-Loan Interest Paid by Parents
If parents pay back a child’s student loans, the IRS treats this as if the parent(s) gave the money directly to the child, who then used it to pay the loan debt. As long as the child is no longer able to be claimed as a dependent, he or she can deduct up to $2,500 of student-loan interest, even if some or all of it was paid by mom and/or dad. And, the child doesn’t need to itemize to take advantage of this deduction.
As you gather your information to file your taxes this year, don’t forget to take these deductions into account.
One of the ways we help our clients is by working hard to provide tax-smart investment strategies to minimize the impact Uncle Sam can have on your bottom line. We also consider it our responsibility to educate you about things that could affect your financial future. If you have any questions about your taxes or how tax-efficient planning can help reduce your tax burden, please give us call. We also recommend that you speak with a qualified tax professional who can advise you on the specifics of your personal tax situation.
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