Have you ever heard of phrases such as “deductible expenses” or “claim your deductible” and you suddenly got puzzled? Worry not because you’re not alone.
Many individuals also don’t understand phrases like these. Because of that, many also don’t know how to reduce their taxable income. Knowing how to decrease your taxable income also means knowing how you can decrease the tax you owe to the federal government.
So how can you claim these tax deductions?
Gather all the essential documents
The initial step towards claiming a tax deduction is to gather all the essential papers and documents. Examples would be the documents that support the deductions for charitable giving, real estate taxes, home mortgage interests, as well as the local income and state tax you paid for the past year.
You might also need to fill up various forms such as the W-2, Form 1098, Form 1098-E, and more. The form you will fill up mainly depends on your employment whether you work as a regular employee, a contractor or home based. These forms shall be filed together will the other documents.
Familiarize the kinds of deductions
The next step is to learn about the kind of deductions available for you. Because less knowledge on this is the main reason why people don’t even bother claiming tax deductions, learning more about it is a must. Here are some of the deductions you may need to know.
Standard – a standard deduction is the amount that the Internal Revenue Service allows to be subtracted from your adjusted gross income or AGI. This is mainly based on your filing status, and if you itemize or not.
Above-the-line – this kind of deduction mainly comes from the gross income. Most people who fill up Form 1040 regardless if they itemize or not have chances to be eligible for this deduction.
Itemized – this is somewhat similar to the standard deduction. The only difference is that itemized deductions are those that you paid for which affects your tax status.
Determine the restrictions
Not all things you spend are eligible for tax deductions. It also has rules and restrictions, and you should know more about it to ensure that you’re getting the right tax deductions you need.
Education – aside from the $2,500 loan interest, you can also write off or deduct $4,000 from your tuition fee and expenses.
Charity – deductibles can be as much as 70% of your overall donations for public organizations and 30%, for the private organizations. However, if your donation shows a sign of capital gain, your maximum deduction can lower down to 30% for public organizations and 20% for private ones.
Credits for being self-employed – if you’re self-employed, you can deduct half of the tax, retirement plan contributions and health insurances you have.
Send out the documents
Now that, you know the forms you need to fill out, and the tax deductibles you’re eligible of, the last step is to send out the necessary documents and the list to the IRS or Internal Revenue Service. Every state has a local address where you can send your documents.
Knowing more about tax deductions may be mind-boggling, but knowing the fact that you can save up is indeed worth learning. With these tips, you will surely face no problem with your tax deduction claims.