Consumer guide to popular tax deductions
Everyone needs to pay their taxes. But there are options that taxpayers can utilize to lower the amount they need to pay. They come in the form of tax deductions. To utilize these deductions, you may want to consult one of the best tax defense companies or learn more about tax deductions on your own. If you opt for the latter, then reading this article is the perfect starting point. We are going to provide you with a simple guide to popular tax deductions, so you can minimize the amount you need to pay.
What are tax deductions?
The first thing a savvy taxpayer needs to do is understand what tax deductions are all about. Aside from tax deductions, it is in your best interest to understand tax credits as well, as they serve much the same purpose. The difference is that a tax deduction reduces your taxable income while the tax credit directly “cuts down” your tax bill.
Both of these options can be extremely valuable, provided you know how to use them best. Furthermore, knowing more about specific tax deductions and credits will allow you to protect yourself from common IRS tax scams. The fact of the matter is that most taxpayers require some sort of assistance from professionals to minimize their tax lien. And this is something that many “scammy” companies take advantage of. To protect yourself, you need to understand how can you claim a tax deduction in the first place.
Two ways of claiming tax deductions
A taxpayer can claim a tax deduction through an itemized list or by taking a standard deduction. As of yet, it is impossible to claim both deduction types at the same time and boost your tax refund amount even further. While itemized tax deduction provides for a greater degree of customizability, it is not always the best option. Sometimes, a standard deduction can be larger than an itemized one. It all depends on your circumstances.
Standard tax deduction
For those that do not want to bother with their tax return too much, standard tax reduction is the “way to go”. This deduction depends on your AGI (adjusted gross income), as well as your filing status. Here’s a quick rundown:
- Single filers in 2022 are eligible for $12,950 tax deduction ($12,550 in 2021)
- Married couples that are filing jointly in 2022 can get a standard tax deduction of $25,900 ($25,100 in 2021).
- Married couples that are filing separately are eligible for a standard deduction that is exactly the same as the one for single filers.
- Additionally, the head of a household can apply for a standard 2022 tax deduction of $19,400 ($18,800 in 2021).
- Lastly, if a taxpayer is older than 65 or is blind, the standard tax reduction is larger.
Itemized tax deduction
Itemized tax deductions are much more complicated than standard ones. There are literally hundreds of available deductions that a taxpayer can qualify for. Most of the time, itemizing your tax deductions can provide you with larger savings but it also requires far more time. Also, there are many different types of taxes in the USA, which makes the whole thing even more convoluted. Most taxpayers choose to consult a professional when it comes to itemizing their tax deductions.
You might also want to consider that the standard tax deduction has significantly increased in the past few years. It now presents a much more viable option than before. With the recent changes, it may be worth your while to re-check if itemizing is still the way to go.
But let’s say that you’ve chosen to itemize your tax deductions, and are now looking for some of the most popular tax deductions out there. After all, these are the options that most taxpayers utilize to great effect. While you may want to look into some of the less popular tax deductions as well, the popular ones are a great starting point.
Popular tax deductions for 2022
Here are the most common tax deductions for the tax year 2022:
- Lifetime learning credit
- Adoption credit
- Gambling loss tax deduction
- Mortgage interest tax deduction
- IRA contributions
- Child tax credit
- American opportunity tax credit
- Earned income tax credit
- Deduction for charitable donations
- Deduction for medical expenses
Lifetime learning credit
Lifetime learning credit allows you to claim 20% of the first ten thousand dollars that you’ve paid for your tuition and associated fees in the previous tax year. The maximum that you can get in tax credit is $2,000. While most benefactors of these tax credits are undergrads and their parents, this credit applies to many more taxpayers as well. Vocational students, graduates, and non-degree students can also claim it. Furthermore, there is no time limit to claim the lifetime learning credit.
This particular tax credit is ideal for anyone that is spending their money on improving their skills. It also shares some similarities with the American opportunity tax credit (more on that later), and you can’t get claim both of them in the same tax year. But you can claim the lifetime learning credit even if you claimed American opportunity credit in previous years.
There are limitations, of course, as you can’t claim this particular tax credit if your MAGI (Modified Adjusted Gross Income) is higher than $59,000, or $118,000 for joint filers. There is also an option of getting a reduced lifetime learning credit for those taxpayers that have a MAGI between $59,000 and $69,000 (doubled if filing jointly). If your MAGI is higher than $69,000, you can’t get the lifetime learning credit at all.
If you are looking to adopt a child (or have already done so), you are eligible for a tax credit of $14,890. The only restriction on getting this particular credit is that you don’t have a MAGI of more than $263,410. But to get the full $14,890, your MAGI needs to be below $223,410. This credit can be used only for certain expenditures, however, including attorney’s fees, court costs, traveling expenses, and other adoption expenses.
Furthermore, if your adoption comes with pre-set conditions (installing a fence around your pool, for example), this can also become a qualified expense. You can learn more about qualified expenses and other limitations in IRS Topic No. 607.
Gambling loss tax deduction
While it is, indeed, possible to deduct your gambling losses from your tax return, there is a significant “catch”. The amount deducted from your gambling losses cannot exceed the amount from your gambling winnings. But if you tend to gamble a lot throughout the year, this tax deduction can become quite significant. While it will not lower your tax return per se, it will help you minimize the impact your gambling has on your taxes.
Mortgage interest tax deduction
One of the most popular tax deductions is the mortgage interest tax deduction. This deduction works in a way that allows you to reduce your taxable income for the amount that you’ve paid in mortgage interests. It is very important to keep clean records, as these interests can provide you with a significant tax deduction for the year.
You can only deduct from the first $1 million of your mortgage debt, or $750,000 if your home was bought after Dec. 15, 2017. Mortgage interest is an itemized tax deduction and is one of the prime factors why taxpayers choose to go with an itemized tax return. Homeowners also have additional options for property tax relief (something that we go into detail about in our property tax relief guide) and can utilize many more itemized tax deductions.
In 2022, you are allowed to contribute up to $6,000 to your IRA (Individual Retirement Account), absolutely tax-free. This is increased if the filer is over the age of 50, and the limits apply to both Roth IRA contributions and traditional ones. And there are additional limitations.
For example, your contribution will be reduced if your MAGI is between $129,000 and $144,000, and it is completely disallowed if your MAGI is higher. For married couples that file their taxes together (or for qualifying widow/er), MAGI cannot be higher than $214,000 to get any contribution at all and be less than $204,000 to get the full contribution amount. Anything between will have their contributions reduced.
Child tax credit
We simply cannot talk about popular tax deductions without mentioning the child tax credit. In 2021, this credit has grown to be as high as $3,600 (from $2,000 previously)!
The main qualifying factor to get this credit is your MAGI, as usual. You can get the child tax credit if your MAGI is below $75,000 (single filers), $112,500 (heads of households), and $150,000 (married, joint filers). Furthermore, there are three thresholds to the credit, where MAGI is above the first threshold but below $200,000 (single filers and heads of households) and $400,000 (married, joint filers). The last threshold is where your MAGI exceeds the above numbers and will be reduced by $50 for every $1,000 of your MAGI that exceeds the previous threshold.
American opportunity tax credit
Similar to the lifetime learning credit, the American opportunity tax credit can help you lower your tax bill by as much as $2,500 each year. You get to deduct the first $2,000 you have spent on any qualifying expense such as tuition, books, supplies, and similar. Do note that you cannot deduct expenses for transportation or living expenses. The last $500 of the credit you get when deducting 25% of your next $2,000 spent on your education.
This credit is specifically designed to be utilized by undergraduate college students (and their parents). They can claim this credit for a maximum period of four years. MAGI requirement to get the full credit is below $80,000 (double if filing jointly), where MAGI between $80,000 and $180,000 is eligible for reduced credit. Any higher than that, and you will not be able to claim this particular credit.
Earned income tax credit
The less you earn, the larger your earned income tax credit (EITC) is. It is unfortunate that this is one of the very popular tax deductions in the U.S. today, but it is what it is. Taxpayers can qualify for this credit with or without children, but the latter will be eligible for a much larger deduction. Also, the beneficiaries of EITC are much more likely to be eligible for the IRS debt forgiveness program.
To qualify for EITC, a taxpayer needs to have at least $1 of earned income in the previous tax year, as well as an investment income of $10,000 or less. Taxpayers can qualify if they are separated from their spouses but are still married to them. But to do so, they need to file their tax returns separately, and the child needs to live with the person who is applying for the credit for a period of more than half a year. The amount that you get from this credit in 2022 is dependent on your AGI and is as follows:
- Families without children and a maximum AGI of $16,480 (single filers) or $22,610 (joint filers) get up to $560 of EITC.
- Families with one child, and a max AGI of $43,492 (single), or $49,622 (joint), get up to $3,733.
- 2 children and a max AGI of $49,399 (single), or $55,529 (joint), get up to $6,164.
- 3 or more children and a max AGI of $53,057 (single), or $59,187 (joint), get up to $6,935.
One of the most popular tax deductions – Deduction for charitable donations
Another great reason to itemize your taxes is the fact that you can deduct the value of charitable donations from your tax return. These donations can be either in cash or property (clothes, furniture, cars, etc.) and will be directly deducted from your taxable income. For the tax year of 2022, taxpayers can reduce $12,950 from charitable donations if they are single filers, $25,900 if they are married and filing jointly, or $19,400 if they are the head of household. Married filers that file separately are counted as single filers for the purposes of this tax deduction.
Deduction for medical expenses
This tax deduction is very simple. You can deduct any qualified medical expenses (that are also unreimbursed) up to 7.5% of your AGI. It is only possible to include medical expenses for the given tax year, and you can’t deduct certain expenses such as over-the-counter medicines, vacations, cosmetic surgeries, etc.
As far as the popular tax deductions go, these were the most important ones. However, a tax deduction is an extremely broad subject, one that warrants quite a bit of time investment. If you would like to know more about tax deductions, the best tax relief companies, or anything else concerning taxes, you can find all the information in Consumer Opinion Guide. We are your #1 resource when it comes to tax relief!