Your goal as a taxpayer should be to hand over as little money as possible to the IRS. And to do that, you need to capitalize on tax deductions.
As a quick primer, a tax deduction exempts a portion of your earnings from taxes. Your actual tax savings are then a result of the tax bracket you fall into, which is based on your income.
Say you’re able to claim a $500 tax deduction, and you fall into the 22% tax bracket. That means you’re not paying taxes on $500 of your income and are saving yourself $110 as a result. Tax deductions shouldn’t be confused with tax credits, which are a dollar-for-dollar reduction of your tax liability.
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With that out of the way, here are five tax deductions you may not have known about.
1. Medical expenses
Some people spend a lot of money on medical bills – even those with decent health insurance. For the 2021 tax year, which is the tax year you’re submitting a return for in 2022, you’re allowed to deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI). This means if your AGI is $50,000 (7.5% of $50,000 is $3,750) and you rack up $5,000 in medical bills, you can deduct $1,250 of that ($5,000-$3,750).
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2. Educator expenses
It’s common for teachers to spend their own money on classroom materials. As an educator, you’re allowed to deduct up to $250 in classroom supplies. And the best part? This is a deduction you can take even if you don’t itemize on your tax return.
3. Self-employment taxes
Though there are benefits to being self-employed, one drawback is you have to pay 15.3% of your income toward Social Security and Medicare taxes. Salaried workers only pay half that amount because they split that 15.3% obligation with their employers. But on the positive side, you can deduct half of your Social Security and Medicare tax bill on your return, so you effectively get some of that money back.
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4. Donated goods
You may be aware that if you give money to charity, you can deduct your contributions on your taxes. But you can also claim a deduction for donated goods. All you’ll need to do is retain receipts documenting your donations, and deduct the fair market value of those goods – not their original value. If you donate a used furniture piece you bought for $800, that piece may now only be worth $300 due to its age and condition – and so $300 is the write-off you’d take.
5. Home equity loan interest – but only in some cases
You can take out a home equity loan and use your proceeds for any reason. But if you take out a home equity loan that you use for home improvement purposes, you can deduct the interest you pay on that loan on your taxes. To be clear, though, it’s just the interest portion of your payments you can claim as a write-off, the same way you can deduct interest on your mortgage but not your total mortgage payments.
Capitalizing on tax deductions could result in big savings. Keep reading up on tax breaks and deductions so you don’t end up paying the IRS a penny more than you need to.
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