Common Tax Deductions and Credits You Shouldn’t Overlook
Most taxpayers are not concerned about tax deductions and credits. Ninety percent of taxpayers take the easy way out and claim the standard deduction. Furthermore, most taxpayers have only W-2 income, so they are not concerned about many deductions, except for the child tax credit or the dependent care deduction. Many people claim the standard deduction and ignore possible credits because they figure it’s not worth the trouble. In a few cases, these people are right. But in most cases, they are wrong.
Many tax preparers take a similar approach. Usually, tax preparation is a volume business. The more forms prepared, and the less time spent on each form, the more money the company makes. But at Phoenix Tax Consultants, we are different. We discovered long ago that diligent tax preparation and close attention to detail, while more time-consuming, help us build relationships with our clients. We do not want to do your taxes just this year. We want to handle this chore every year.
Common Tax Deductions
Before we dive into this topic, we should briefly address the difference between deductions and credits. Usually, deductions reduce taxable income, typically above Line 15 on Form 1040. Deductions typically indirectly affect the amount of tax owed (or, better yet, the size of the refund). Credits reduce the bill, dollar for dollar. Both are good. Credits are better.
As mentioned, almost all do-it-yourself filers, as well as most third-party tax preparation services, check the standard deduction box and proceed. In 2024, the standard deduction was $14,600 for single filers, $29,200 for joint returns, and $21,900 for head-of-household filers (usually adults with at least one dependent child in college or at home).
Taxpayers must choose between the standard deduction and itemizing to determine their tax liability. So, the choice is a matter of simple math. Itemized deductions must exceed the standard deduction for itemization to be worth it. Common itemized deductions include:
- Mortgage Interest: If your home qualifies and you purchased the house in the last five years, the mortgage interest deduction, by itself, usually exceeds the standard deduction. Borrowers mostly make prepaid interest payments over the first five years of an amortized mortgage loan.
- SALT: This deduction is especially worth a look in the Northeast, where state and local taxes are usually high. Current law caps the state and local tax deduction at $10,000. The SALT deduction, like the mortgage interest deduction, may be enough to exceed the standard deduction amount.
- Charitable Contributions: The government doesn’t limit the amount of the charitable contribution deduction. Small monthly contributions to religious or other qualified organizations add up quickly. Special rules apply to these contributions, underscoring the importance of hiring a skilled Phoenix tax preparer.
- Medical Expenses: These costs (not including health insurance premiums) are deductible if they exceed 7.5% of the taxpayer’s adjusted gross income. This category may also include ancillary costs, such as Uber rides for individuals with disabilities, but the law is unclear.
- Teachers and Students: Educators can deduct up to $300 for classroom supplies and other such purchases ($600 if married filing jointly). Up to $2,500 of interest paid on qualified student loans may be deductible, depending on income limits.
Self-employed individuals are entitled to several deductions, such as the home office deduction, business expenses, and health insurance premiums, as well as, perhaps most beneficially, 50% of the dreaded self-employment tax.
Common Tax Credits
The Earned Income Tax Credit (EITC) is a refundable tax credit for low- to moderate-income workers. The amount depends on income and the number of children. Even filers with no tax liability can receive this credit.
We mentioned the child tax credit above. For 2024, up to $2,000 per qualifying child under age 17. A portion may be refundable, depending on income.
The child and dependent care credit offsets daycare costs for children under 13 (or disabled dependents), so you can work or look for work. Taxpayers may claim up to 35% of qualifying expenses, capped at $3,000 for one child or $6,000 for two or more.
Other common tax credits include the American Opportunity Tax Credit, Lifetime Learning Credit, Saver’s Credit, and Residential Energy Credits. Most higher education students are eligible for the AOTC and LLC. The Saver’s Credit applies to some 401(k) contributions, and items like solar panels, heat pumps, or energy-efficient windows could bring a tax credit.
For more information about these and other credits and deductions, contact us online or call 610-933-3507.