Lower Your Taxes With These Tax Deductions
They say only two things are guaranteed in life. Death….. and taxes.
Nobody likes paying taxes, though. Well, some people do, but they are clearly not the majority here.
The IRS might seem really greedy when it comes to YOUR hard-earned money, but at least they were gracious enough to litter the tax code with deductions.
Next tax season, see if you can take advantage of any of these deductions to keep the IRS’s hands off more of your dollars.
Both traditional and Roth IRAs offer tax deduction. We won’t explain the nuances in-depth (we have an article for that), but just know this: traditional IRA contributions are tax-deductible when you make them, while Roth IRA tax deductions only happen when you withdraw funds in retirement.
However, both types of IRAs phase out their benefits at certain income thresholds. Traditional IRAs directly phase out your tax deduction, while Roth IRAs indirectly phase it out by phasing out the amount you can contribute (since they can’t do anything about the future).
Refer to our article on traditional vs. Roth IRAs for more information on deduction and income phaseout amounts.
Health Savings Accounts (HSA’s)
Health Savings Accounts, or HSAs, are personal savings accounts set aside specifically for qualified medical expenses. They have more tax benefits than one; they actually have three:
- Contributions are pretax (aka tax-free), reducing your income taxes (just like contributions to a 401k)
- Your funds in the account grow tax-free (at the federal level, state and local tax laws may differ although most states follow the federal tax law for HSAs)
- Withdrawals/spending out of your HSA is tax-free if used for qualified medical expenses
Some of the more common qualified medical expenses include
- Doctor/dentist checkups
- Prescribed treatments
- Medical devices
HSAs do have a cap on yearly contributions that may change when tax law changes, so visit the IRS site to learn more.
In fact, the IRS’s website is always a safe bet when it comes to tax stuff. Head over there to see what qualifies as an HSA medical expense.
Homeowners rejoice, because some or even all that interest you’re paying on your mortgage AND any home equity loans could be deducted from your tax bill.
How much, you ask?
Well, it changes when the tax code changes (as do all these deductions) and it varies with filing status. Currently, married couples filing jointly can deduct interest on up to $750,000 of qualified home loans, while those filing separately can deduct interest on up to $375,000 of home loans.
That’s a lot of interest to deduct.
No longer will you be “throwing money into the furnace” with your interest payments, as it’ll all come back to your during tax season.
Student Loan Interest
You’re a recent graduate, you’re broke, your first job isn’t what you hoped for in position or pay, and your weighed down by a mass of student loans.
But guess what? The IRS lets you deduct interest on these loans to the tune of up to $2,500 of pure interest per return, not per person.
Yes, that means if you’re filing as single, you can deduct an entire $2,500 of student loan interest paid in the tax year you’re filing for.
Might not be much in the grand scheme of things for many students burdened with debt, but hey, that alone could pay your rent for a few months.
The government appreciates your generosity and recognizes it by allowing you to deduct certain charitable donations.
Independent Contractor/Self-Employed Deductions
Meals bought for business/client entertainment purposes that aren’t lavish or unnecessarily expensive can be deducted up to 50% if you keep the receipts, or you can deduct 50% of the standard meal allowance found on the IRS site.
Miles are deductible, but the rate seems to shift every so often. For 2019, you can deduct 58 cents for each mile driven for business, up from 2018’s 54.5 cents per mile. If you are self employed and need to track these, check out our article on the best mileage tracking apps out there today.
Hold onto those receipts! Every single purchase you make for your business could be deducted partially of fully from your taxes.
Many items that can be used for business and personal purposes, like laptops and cars, usually stipulate that you can only deduct the portion of the item used for business. So you could deduct 40% of the price of a laptop you use 40% for business purposes and 60% for non-business purposes.
One amazing little section of the tax code called Section 179 says that certain items can be deducted fully in the year they’re placed into service as long as they’re used for at least 50% business.
THAT’S a good deal.
The work-from-home crowd can knock down their tax bill through the home office deduction. At its core, you can deduct your home office (if used exclusively for business purposes) either based on square footage at $5 per square foot up to 300 square feet (this is the simplest method) or on your actual home office expenses.
The IRS can’t really tell exactly how much of your home is used for business purposes, so you’re operating on the honor system. However, you could always be selected for audit, so keep detailed records and represent everything truthfully to the best of your ability.
Get An Accountant And A Financial Advisor
We strongly believe in using a financial advisor to work with you towards financial goals. They’ll serve you well in any arena involving money, but since we’re talking taxes here, we’d recommend finding a qualified accountant too.
You have two options here:
- Certified Public Accountant (CPA)
- Enrolled Agent (EA)
CPA is a much more renowned title because it’s considered the gold standard in accounting. That being said, accounting is a broad field, meaning CPAs specialize in a certain area. Make sure to find one who specializes in tax. If you find one who’s done nothing but audit all their life, they’ll know tax basics, but not as much as you might think.
EA’s are tax specialists only. They tend to charge less than CPAs, but only because the title is less well-known. That doesn’t mean they’re services are of poor quality. In fact, the IRS itself administers the EA designation. If you’re looking to save a little cash without sacrificing service quality, seek out an EA.