Do you know what tax breaks you’re eligible for? There are a number of ways to reduce your taxable income or to receive tax credits from the federal government. Make sure you don’t miss out on some of the most common tax breaks this year.
Before you file your tax return, you should determine whether it would be more cost effective to take the standard deduction or itemize your deductions.
The standard deduction is a dollar amount that an individual may subtract from their income and is based on their filing status, which is determined by marital status and family situation. For example, an individual could be single, married, married filing separately, married filing jointly or a widower.
To take the standard deduction, you will need to provide your age, your spouse’s age (if married), filing status and citizenship status. The standard deduction amount varies each year. For 2012, the deduction for a single individual is $5,950. For a married individual, filing jointly, it’s $11,900.
It’s a good idea to estimate the total amount of itemized deductions you might be able to take in order to determine which option would give you the larger amount of deductions.
There are a number of deductions available to taxpayers. Here are some of the main deductions that you should know about.
There are various tax breaks available to help out with the costs of higher education. For example, if you have paid tuition for you, your spouse, or a dependent, then you can deduct those fees from your taxes. This deduction can reduce your income subject to tax by up to $4,000. In addition, any interest on a student loan may also be deducted from your taxes. You may reduce your income subject to tax by up to $2,500. You may take either of these deductions even if you do not itemize deductions.
Charitable contributions are only deductible if you are itemizing deductions. These include any contribution—either cash or other property—to a “qualified” organization. Qualified organizations include churches and other religious organizations, non-profit hospitals, educational organizations, Red Cross and Goodwill Industries, Inc. (Also read: Tax Donation Tips For Tax Time.)
Home Mortgage Points
Charges paid to acquire a home mortgage add up as “points.” These points are prepaid interest and may be deductible as home mortgage interest. In order to deduct the points, your loan must be secured by your main home, paying points is a reputable business practice where you live, and the points paid were not more than the amount usually charged where you live, among other requirements.
(Also read: Home Mortgage Points Explained: The Pros And Cons.)
Individual Retirement Arrangements
Individual retirement arrangements, or IRAs, allow you to save money for retirement while also offering you tax benefits. You may be able to deduct some or all of your IRA contributions.
Class Room Deduction for Teachers
If you are an eligible educator, you can deduct up to $250, or $500 for a married and joint filer, for any classroom expenses including books, computer equipment, paper and other classroom materials. Eligible educators include teachers, instructors, principals, and aides. Eligible educators must work at least 900 hours a year.
Unlike deductions, tax credits actually lower your taxes dollar for dollar, instead of just lowering your taxable income. There are many tax credits available for taxpayers, so make sure you know which you qualify for before filing your tax returns.
Earned Income Tax Credit
The earned income tax credit, or EIC, is a credit for low to moderate income working individuals and families. The credit was first made available from legislation passed in 1975 to offset the burden of social security taxes and provide an incentive to work.
For 2012, to be eligible for the EIT, a single individual with no children must make less than $13,980. They would get a $475 credit. The income varies depending on marital status and family status, with the top amount of income at $50,270 for a married taxpayer with three or more children. They would receive a $5,891 credit.
A child tax credit of up to $1,000 per qualifying child, depending on income, is available to taxpayer. The child must be under the age of 17 and must be your son, daughter, stepchild, foster child, brother, sister, stepbrother or stepsister or descendant of any of these individuals.
For expenses paid for the care of your children under age 13 in order to allow you to work or look for work, you may be able to take a child and dependent care credit.
If you adopted a child, you may be able to claim a refundable tax credit for your adoptionexpenses.
In addition to education deductions, you may also be eligible for education credits. The American Opportunity Tax Credit modifies the existing Hope Credit for tax years 2009 and 2010 and was extended to apply for tax years 2011 and 2012. Students receiving the credit can receive up to $2,500 of the cost of tuition, fees and course materials paid during the taxable year. In addition, 40% of the credit, up to $1,000, is refundable, which means you can get it even if you owe no tax.
Another credit available is the lifetime learning creditof up to $2,000 for qualified post-secondary education expenses paid for all eligible students during the tax year, as well as for courses to acquire or improve job skills.
Taxpayers who made energy efficient improvements to their homes may be eligible for a tax credit of 10% of the cost, up to a maximum of $500. Approved improvements include new windows, insulation, water heaters and air condition.
Where To Get Tax Help
It may take some extra time, but figuring out what deductions and credits you’re eligible may be worth it if you can save some money. Check out the website of the Internal Revenue Service here for more information on credits and deductions. You can even call volunteers, toll-free on Monday through Friday with any tax questions at 1-800-829-1040.