What is a tax deduction?
A tax deduction reduces your taxable income, lowering your tax bill. The amount of the tax deduction is deducted from your income, lowering your taxable income. Your tax bill will be lower if your taxable income is low.
Tax credit and How it works
The tax credit is a one-to-one reduction in your tax liability. A few credits are refundable, so if you owe $250 in taxes but are eligible for a $1,000 credit, you will receive a check for the difference of $750.
How to claim tax deductions: There are two options for claiming tax deductions: the standard deduction or itemizing deductions.
A. Typical Deduction:
The standard deduction is essentially a one-dollar deduction.
The standard tax deduction increases for people over 65 or those blind.
- Itemizing deductions: Itemizing allows you to reduce your taxable income by claiming any of the hundreds of tax breaks available to you. You’ll pay less in taxes if you can do as much tax deductions to save money as possible.
Is it better to itemize your deductions or accept the standard deduction?
- If you have standard deductions that are less than the total of your itemized deductions, itemizing will save you money.
- If you have a standard deduction that is greater than the sum of your itemized deductions, taking the standard deduction may be worthwhile (and the process is faster).
Note: Because the standard tax deduction has increased dramatically in recent years, you may discover that it is now the better option for you, even if you previously itemized it. Your tax software or your tax preparer
Individuals can benefit from several popular tax deductions and credits to help them save money.
- Child Tax Credit (CTC):
The child tax credit, sometimes known as the CTC, is an annual tax credit offered to taxpayers with dependent children who meet specific criteria. It was first presented as part of the Taxpayer Relief Act of 1997, and it has been essential in providing financial assistance to American taxpayers with children.
As a part of the American Rescue Plan, the tax credit, previously limited to $2,000 per qualifying dependent, was increased to a maximum of $3,600 in 2021. (The relief package for that took effect in March). As a result, for the first time in US history, many taxpayers received half of the credit as monthly payments in advance from July through December.
Above specified levels, the credit begins to taper out.
- First phase-out: Income exceeds the above limits but is less than $400,000 (married filing jointly) or $200,000 (single filing) (all other filing statuses). For each $1,000 spent, your total credit per child can be lowered by $50. (or a fraction thereof). Your credit will not be reduced by below $2,000 per child due to this phase-out.
- Second phase-out: Earnings of more than $400,000 (married filing jointly) or $200,000 (single filing) (other filing statuses). The phase-out will continue to deduct $50 for every $1,000 spent, bringing your credit per child below $2,000 for the first time. It’s possible that you won’t be able to acquire the credit at all.
Some other requirements to be eligible for the child tax credit include:
- You must have supported the child for at least half of the previous year, and the child must have or be living with you for at least half of that time.
A combined tax return is not possible for the child.
- You must have spent more than half of the year in the United States.
- Tax credits for child and dependent care:
These tax deductions and credits are designed to cover a portion of the cost of day care and other similar expenses for a kid under the age of 13, a spouse or parent who cannot care for them or another dependent so that you may work.
- Opportunity tax credit in the United States:
This allows you to deduct all your tuition, books, equipment, and school fees up to $2,000, but not living expenses or transportation.
- Lifetime learning credit:
You can claim 20% tax deduction of the first $10,000 you spent on tuition and fees, up to a maximum of $2,000 in lifetime learning credit. Just like the American opportunity tax credit, the lifetime learning credit excludes living and transportation expenses from the list of eligible costs. In addition, you could also claim books or supplies that are required for your coursework.
- Interest on student loans can be deducted:
If you paid interest on your student loans, you could deduct up to $2,500 from your taxable income.
- Credit for adoption:
This item covers up to $14,440 in adoption fees per child for the 2021 tax year.
- Earned income tax credit:
Depending on the number of children you have, your marital status, and your income, you might receive anywhere from $1,502 to $6,728 in this credit for the 2021 tax year. If your AGI is less than $57,000, it’s worth looking into.
- Deduction for charitable contributions:
If you itemize, you may be able to deduct the value of your charitable gifts from your taxable income, whether they’re in cash or property like clothes or a car.
- Deduction for medical expenses:
In general, if your eligible, unreimbursed medical expenses exceed 7.5 per cent of your adjusted gross income for the tax year, you can apply for tax deductions to save money.
- State and local tax deduction:
You can deduct up to $10,000 ($5,000 if married filing separately) in property taxes plus state or local income taxes or sales taxes.
- Mortgage interest deduction:
The mortgage interest tax deduction is promoted to reduce the cost of homeownership. It reduces the federal income tax that eligible homeowners pay by deducting the mortgage interest they pay from their taxable income.
- Deduction for gambling losses:
Gambling losses and expenditures are only deducted to the degree that gambling winnings are deducted.
- Deduction for IRA contributions:
You may be eligible to deduct payments to a traditional IRA, albeit the amount you’re able to deduct is determined by whether you or your spouse is covered by a workplace retirement plan and your income.
- Deduction for contributions to a 401(k) plan:
The money you put into a 401(k) immediately from your paycheck isn’t taxed by the IRS (k). The contribution cap for 2021 was $19,500 ($26,000 if you’re 50 or older). The contribution maximum will increase to $20,500 per year in 2022 ($27,000 for individuals over 50). Employers normally sponsor these retirement plans, although self-employed people can open their own 401(k).
i) Credit to the saver:
This ranges from 10% to 50% of contributions to an IRA, 401(k), 403(b), or specific other retirement plans up to $2,000 ($4,000 if filing jointly). The percentage varies depending on your income and filing status.
- Tax Deduction for contributions to a health savings account:
HSA contributions are tax-deductible, and withdrawals are tax-free if the funds are used for eligible medical costs.
- Deduction for self-employment expenses:
There are numerous tax benefits for freelancers, contractors, and other self-employed individuals.
- House office deduction:
The IRS allows you to deduct associated rent, utilities, real estate taxes, repairs, maintenance, and other relevant expenses if you utilize part of your home frequently and exclusively for business-related activity.
- Deduction for educator expenses:
You can deduct up to $250 in classroom materials if you’re a teacher or other eligible educator.
- Credit for residential energy use:
This one can save you up to 26% on solar energy systems installation costs, such as solar water heaters and solar panels.
Knowing about tax deductions and credit is important, as it prevents you from paying more than what you owe. Mercurius Advisory Services, with its seasoned team of experts, offers you top-notch professional services with the filing of taxes, bookkeeping, etc. We provide you with a hassle-free tax filing experience so that you don’t have to worry about the deadlines or the approaching due dates. To sail smoothly through this tax filing season, go visit our website to know more about us and the services that we provide- www.mas.net.in