It’s tax time! Don’t you just love filing taxes? Yeah right, crunching numbers isn’t your idea of a good time, but the $125 billion issued in refunds may grab your attention. The IRS reported that in 2015 the average refund issued was $3,120. Tax deductions can lower your tax bill, big time!
Grab your laptop, a cup of joe, and curl up on the couch to get your taxes done. While you’re at it, here are six tax deductions you won’t want to miss.
1. Retirement Contributions
You can contribute up to $5,500 in your IRA. If your IRA is a traditional account (versus Roth) then you can deduct your contribution. Haven’t maxed out your IRA contributions just yet? It’s not too late, you can make 2016 IRA contributions, until April 18 2017.
2. Student Loan Interest
An eye-opening experience is to see how much you spent in interest on your student loans last year. While it’s gut wrenching seeing that you could be spending thousands annually in interest, you can deduct up to $2,500 of your student loan interest.
After these deductions, you’ll see your adjusted gross income, or AGI. Then, everyone can get the standard deduction which is $6,300 for single tax filers, or $12,600 for those married filing jointly. Get your numbers together for the next categories to see if an itemized deduction is more than the standard amount for you.
3. Medical and Dental Expenses
Did you find yourself in the emergency room last year? Health bumps in the road aren’t fun, but at least the IRS gives you a tax break for medical and dental expenses that exceed 10% of your adjusted gross income. You can deduct fees to doctors, surgeons, chiropractors, psychiatrists, and more.
4. State Sales Tax and Property Tax
You can deduct state sales tax or state income tax (not both). If you live in a state with no state income tax, then think of any large purchases you made this past year like a new car, boat, appliances, or home building materials.
If you’re a homeowner then you can deduct the amount that you paid in property taxes.
You can deduct your donations to nonprofits or charities, along with other costs involved with volunteering like the ingredients used for a church bake sale, or even the mileage driven to a charity event. Just make sure you have receipts and good records.
6. Interest on Mortgage
Wanna know an interesting fact on 30-year mortgages? Although your total interest and principle payment remain the same over the life of your loan, the majority of your payment is initially going towards interest versus paying off the home itself. Within the first ten years typically 80-90% of what you are paying is towards interest, so make sure to deduct interest on your mortgage.
There is a difference between a tax deduction and tax credit.
A tax deduction reduces your taxable income versus a tax credit is a direct reduction of how much you pay in taxes. For example, if you make $50,000, and you deduct $5,000 paid in interest from your mortgage, you’ll be taxed at $45,000, and you’d be in the marginal tax rate of 15%. Your tax savings isn’t a direct $5,000, it is $5,000 X 15%, or $750.
This year take advantage of all the deductions you can.
This post was written by Carly Serna, founder of The Finance Plan.
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About The Author:
Carly is an Austin entrepreneur, millennial, marathon runner, world traveler (20 countries and counting!), and University of Texas finance graduate. She went from owing over $34,000 to becoming debt-free with a nest egg over $100,000 by age 26. She created a class about money to teach how to get out of debt, invest, save for a rainy day, and plan for the fun things in life like buying a car, home, or even going on a once in a lifetime trip. Get her weekly posts on life and money here.