Tax Deductions: What You Need to Know

Tax deductions are a great way to reduce your taxable income and save money on your taxes. But with so many deductions available, it can be hard to know which ones you qualify for and how to maximize your savings. In this article, we'll explain the different types of deductions, how to determine which ones you can take, and some of the most common deductions you may be missing out on. The two main types of deductions are the standard deduction and itemized deductions.

The standard deduction is a one-time deduction for a fixed amount that you can take if you don't itemize. The amount of the standard deduction varies depending on your filing status. For 2020, the standard deduction is $12,400 for single filers, $18,650 for heads of household, and $24,800 for married couples filing jointly. Itemized deductions are more complex and require you to list out all of your eligible expenses on Schedule A of your income tax return.

Common itemized deductions include mortgage interest, state and local taxes, charitable contributions, medical expenses, and gambling losses. To qualify for an itemized deduction, the total amount of your deductions must exceed the standard deduction amount. In addition to these two main types of deductions, there are also non-commercial deductible taxes such as personal property taxes and real estate taxes. You can also deduct sales taxes or state income taxes from your federal income tax if you live in a state without its own income tax.

If you made a large purchase such as an engagement ring or a car, it may be beneficial to deduct sales tax instead of state income tax. You may also be able to take advantage of certain tax credits that can reduce your tax bill dollar-for-dollar. Common credits include the Child Tax Credit, the Earned Income Tax Credit, the Child and Dependent Care Credit, the Savings Credit, the Foreign Tax Credit, the U. S.

Opportunity Credit, the Lifetime Learning Credit, and the Premium Tax Credit. You can also establish a state-sponsored college savings plan known as a Section 529 plan which allows tax-free withdrawals to cover qualified college expenses. And if you're a university student or recent graduate, there are several tax deductions available that can help reduce your taxable income. Finally, don't forget about employer-paid taxes. Even though you don't get to keep this money directly, you can deduct the employer's 7.65% share of their income taxes from your taxable income. By taking advantage of all available deductions and credits, you can significantly reduce your taxable income and save money on your taxes. Be sure to consult with a tax professional or use tax software to ensure that you're taking all of the deductions you qualify for.