Paying taxes is a necessary evil. Yes, it strips us of a significant portion of our income, but it directly contributes to the growth of our nation. Taxes are the primary source of income of the state and federal governments and as such, form the backbone of various development activities: From the public park that our kids play in, to the streets that we drive on.
While it may seem that you are often taxed more than what is needed, did you know that your government accounts for your expenses while determining the amount of taxes you owe? Yes, there are various types of deductions you can make while calculating the amount of taxes that you owe. By taking these into consideration, you can reduce your taxes considerably.
Here are 6 things that you probably didn’t know were tax deductions
1. Insurance Premiums and Medical Expenses
Any medical expense that you bear during the financial year can be deducted from your taxes as long as they are above 7.5% of your gross income. These medical expenses don’t just include hospital bills. While it may be obvious that your insurance premium would contribute to your medical bills, it may be surprising to know that even wheelchair access ramps and support rails may make the cut, provided they are installed for medical reasons.
2. Education Expenses and Student Loan
If you are paying for your education or paying back your education loan, the government aids you in this endeavor by providing you a tax deduction based on the amount of expenditure. Such education tax benefits can include a variety of expenses, all the way from primary school to college
This particular tax benefit is offered in two different forms. The first category, American Opportunity Tax Credit (AOTC), offers you tax benefits of up to a maximum value of $2500 during the first four years of your higher education. The second category, Lifelong Learning Credit (LLC), is intended to help you pay for your undergraduate, graduate, and professional degree courses. This allows for tax benefits of up to $2000 per year.
3. Sales Tax and State Income Tax
The income tax that you pay to your state or the sales tax that you paid can be deducted from your Federal Tax. But there is a catch. You can only deduct either one of these, but not both. This, however, can work to your advantage if you live in a state that does not have its own income tax. If that is the case, you don’t have to pay any state income tax and at the same time, you can get your sales tax deducted from the Federal tax. But to take advantage of this, you need to itemize your deduction. You cannot directly apply for a standard deduction.
4. Donations and Charity
Donating to a charity or volunteering for a social cause can be extremely satisfying and can uplift your spirit. Parallelly, they can also help you save some money. Your contributions to a charity and any expenses that you might bear while participating in a social volunteering event can be deducted from your taxes. These can also include indirect expenditure that you may have incurred to enable your participation as a volunteer. Though you must keep in mind that you should keep your receipts and proofs of expenditure safely as they will be required while claiming the deduction. However, the experts at keepertax.com suggest that in the event that you lose track of your receipts, you can also use your bank statements as proofs for write-offs. Bank statements constitute an Income Revenue Service compliant record for most expenses.
5. Property Mortgage and Sale
If you have a mortgage, you can write off a significant amount of tax. The deductible amount can be as high as $750,000. However, only the interest paid on the loan amount invested in the house is eligible for deduction. Interest paid on loan amounts used on personal expenses is not considered. Even when you sell a house, the Income Revenue Service (IRS) allows you a tax deduction of up to $250,000 from the profit that you make.
6. Energy-Based Tax Incentives
If you invest in making your home more energy-efficient, either through the implementation of renewable energy systems or the installation of energy-efficient appliances, you can save up on tax through Residential Energy Credits. This covers renewable and clean energy systems like geothermal heat pumps, small wind turbines, solar panels, and fuel cells, and energy-efficient systems like central air conditioning. The tax credit for the year 2021 to 2022 amounts to 22% of the expenditure incurred.
Accounting for these deductions can result in a noteworthy reduction in your taxes. However, tracking all your expenses that might qualify for these deductions could be quite tiring. But you could benefit from dedicated software, apps, and websites that help you keep a track of your expenses and identify how and where you could save up on your taxes.