Tax deductions are a great way to reduce the amount of income that is subject to taxation by the federal and state governments. By taking advantage of deductions, taxpayers can lower their taxable income and ultimately their tax liability. In simple terms, a tax deduction is an expense or cost that can be subtracted from your income to reduce the amount of taxes you owe. You may have heard your father talking about deducting mortgage interest taxes and been left with a confused look on your face.
To help clear up any confusion, it's important to understand that some tax credits are even refundable. This means that if the credits reduce your tax bill to less than zero, you'll get a refund for the difference. If you choose to take the standard deduction, your taxable income is automatically reduced by a fixed amount depending on how you file (e.g., single, married filing jointly, or married filing separately). When it comes to filing taxes, you must record expenses in Schedule A and keep all receipts in case of an audit.
Not everyone qualifies for all tax deductions, but here are some common deductions you may be eligible for: mortgage interest, retirement plan contributions, HSA contributions, student loan interest, charitable contributions, medical and dental expenses, gambling losses, and state and local taxes. Additionally, if you live in a state without income taxes or have made large purchases such as a new car or furniture set for the living room, the sales tax deduction is an option. Legal tax deductions can help lower your taxable income and thus reduce your federal tax liability. 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 may also be able to reduce your taxes by itemizing deductions in Schedule A (Form 1040). By taking advantage of legitimate tax deductions, you can lower your taxes owed and even qualify for a larger tax refund.