Taxes are inevitable, but if you know how to optimize your finances at the end of the year, you can ease your tax burden and keep more money for your future. Consider this list of overlooked tax deductions and credits that may provide you with ways to lower your tax bill.
1. Donations: Giving money to charity not only feels good, it can also be used as a financial tool. Donations to most registered 501(c)3 organizations can be written off and used as tax deductions. And it's not just cash, you can deduct the fair market value of physical donations like clothes, furniture, books, and household items. Just make sure to ask for a receipt for any donations to keep for your accounting records.
2. Medicare Premiums1: Whether you're already on a Medicare plan or thinking about one in the future, it's good to know that you can deduct your premiums on your tax return. Applicable plans include:
- Medicare Part B
- Medicare Part D
- Medigap insurance
- Medicare Advantage Plan
Remember, you can deduct medical expenses like your Medicare premium only if they add up to more than 7.5% of your adjusted gross income (AGI).
3. Child and Dependent Care2: The costs of childcare and the care of a dependent continue to rise, which can often feel like a costly added expense to your budget. The child and dependent care credit can alleviate some of this cost by providing you a credit on your tax bill. The amount of your credit will be based on your income and the percentage of expenses you pay in care-related costs. To claim the credit, you will have to file a special form with the IRS. Consider speaking with a financial professional who may be able to help.
4. Mortgage Interest and Property Taxes3: As a homeowner, you have the right to certain deductions you may have been unaware of. Property taxes and any interest you may have on your mortgage can be deducted each year. To be eligible, the property must be your primary residence. There are also limits to your deductions which often change yearly. Before taking advantage of these deductions, make sure you understand the deduction limits and if you qualify.
5. Home Office Deduction4: More and more people are using home offices than ever before. With the shift in remote work, it's more likely that you're using a home office today than just a few years ago. If you are one of those remote workers, did you know that you can deduct any expenses related to your home office? You can deduct everything from utilities, home repairs, insurance, and other home expenses as they relate to your office. Just remember, this deduction generally only applies to self-employed individuals.
Let the system work for you
The IRS has very specific rules and limits on tax deductions and credits. It's important to understand which deductions you can apply to your year-end taxes to help lower your taxable income. By reducing your tax bill you can save extra money, which can be used to save for retirement, spend on your family, or anything else you'd like.
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