Tax deductions–two words that taxpayers like to hear when filing their tax returns. While there are many tax deductions that can be claimed, there are a few tax deductions that are most commonly claimed. Here, we will talk about the 8 most common tax deductions that taxpayers claim. Commonly claimed tax deductions differ for taxpayers who claim dependents and for those taxpayers who do not claim dependents.
Common Tax Deductions For Taxpayers With Dependents
1. Earned Income Credit.
If qualifications are met, working individuals who have low to moderate earned income may be eligible to claim this credit. This is a refundable credit, meaning that this credit can reduce a person’s tax liability below zero, in return, resulting in a refund. Even if a taxpayer doesn’t have a tax liability, they could still qualify for the credit. In some cases, qualifying for this credit can result in a substantial income tax refund.In other words, qualifying for this credit is like receiving free money, which is why this credit is one of the most abused IRS credits on the books. This tax deduction is so lucrative that some people attempt to claim people as their dependents that don’t even qualify as dependents, in order to qualify for the credit. Though the IRS has implemented ways to curb the abuse of this credit, thus far, their efforts have seemingly fallen short of being victorious.
Refer to the IRS Pub 596 for more information regarding this credit.
2. Child and Dependent Care Credit.
If you paid expenses for the care of a qualifying individual to enable you and your spouse to work or actively look for work, you may be able to claim this credit. One of the requirements to claim the credit is that you file a joint tax return. If your filing status is married filing separately, you may not take the credit. The percentage of the credit amount of work-related expenses you paid to a care provider depends on your adjusted gross income.
For one qualifying individual, the total amount of expenses that you can use to calculate the credit is $3,000 and $6,000 for two or more qualifying individuals. In order to claim the credit, you must provide information about the care provider on the tax return, such as name, social security number, E.I.N. and address. Use the Form W-10 to obtain this information from the care provider.
Refer to the IRS Pub 503 for more information regarding this credit.
3. Child Tax Credit.
Depending on your income, this credit could be worth up to $1,000 per qualifying child under the age of 17. To qualify for this credit, six tests must be met. The tests are as follows; age test, relationship test, support test, dependent test, citizenship test, and residence test. If your modified adjusted income (MAGI) is above a certain amount, the credit is limited. The amount at which the phase-out of the credit begins depends on your filing status. The phase-out begins at $110,000 for couples filing a joint return, for married couples filing separately, the phase-out begins at $55,000, and the phase-out begins at $75,000 for all other taxpayers.
Refer to IRS Pub 972 for more information regarding this credit.
4. Education Credits.
Two credits are available for taxpayers who pay expenses for higher education (secondary education). You can claim one credit for each eligible student. The two education credits are the American Opportunity Credit and the Lifetime Learning Credit. If you, your spouse, or a dependent was a student enrolled at, or attending an eligible institution, you may be able to claim an education credit. To claim the credit, complete the Form 8863. Keep in mind that if a person is not claimed as a dependent on your tax return, you cannot claim an education for them, even if you are paying for their educational expenses.If you modified adjusted income (MAGI) exceeds a certain amount, you will not be able to claim the credit. SEE BELOW.
o For the American Opportunity Credit: $180,000 or more if married filing jointly, or $90,000 or more if single, head of household, or qualifying widow(er).
o For the Lifetime Learning Credit: $128,000 or more if married filing jointly, or $64,000 or more if single, head of household, or qualifying widow(er).
Refer to IRS Pub 970 for more information regarding this credit.
Other Common Tax Deductions
5. Charitable Contributions.
To claim this deduction, you must make contributions to qualified organizations. No, making a donation to the needy family next door, while admirable, does not qualify as a legitimate charitable contribution for tax purposes. The deduction is reported on the Form Schedule A (Itemized Deductions). For certain types of property, such as automobiles, investments, and inventory that have appreciated in value, certain rules apply.
Refer to IRS Pub 526 for more information regarding this deduction.
6. Medical Expenses.
Only allowable medical expenses that exceed 10% of your Adjusted Gross Income (AGI) are deductible. When calculating medical expenses, you can include most medical or dental costs that you paid for yourself, your spouse and dependents. You must itemize deductions (use Schedule A), and you can only claim allowable medical expenses paid during the tax year. You cannot claim expenses that were paid for by a Health Savings Account (HAS), or Flexible Spending Arrangement (FSA).
Refer to IRS Pub 502 for more information regarding this deduction.