It's that time of year again. Tax season! We really should be conscious of taxes and deductions all year long, but when April comes, it's always scramble time. Today we're going to talk about different things you might be able to deduct from your taxable income.
But before we get into that, I want to clarify what "writing it off" really means. The term is thrown around so much when friends and coworkers buy a new laptop or iPhone 6 Plus or continue to pay for Netflix, Hulu, HBO, and Amazon Prime. But writing things off doesn't make them free, it only reduces your taxable income. Additionally, in order for deductions to take effect, you have to pass the 2% floor. This means your deductions must be at least 2% of your adjusted gross income before they start to take effect. So if you make $100,000 and deduct $2,001 of itemized expenses, your taxed income will be $99,999. To make sure it's worth your while, make sure you can clear that 2% mark by a distance.
Mortgage Interest and Property Tax
Paying off a house is a long, expensive endeavor, but you can at least deduct the interest you pay on the house, which adds up over time. This is not the actual mortgage payment though, just the interest. You can also deduct property tax on any non-business real estate you own.
While this is probably the most laborious of all deductions, it could save you a lot if you've made any large purchases in the last year. A new car, laptop, or engagement ring sales tax can be deducted, but you have to itemize each purchase.
Charity and Gifts
Charity is one of the biggest ways to get a tax break. You can deduct any cash or property that you give to a nonprofit organization. Anything under $250 requires some form of documentation while anything over $250 requires an official receipt or acknowledgement from the nonprofit. If you donate any sort of property over $500, you'll need to fill out a Form 8283 tax return as well.
Babysitters While You Volunteer
This is a niche one, but worth mentioning. If you're a parent who hires a babysitter while volunteering for no pay, you can deduct the full cost of the babysitter.
Medical Expenses and Health Savings Accounts
Paying for health insurance is a non-negligible cost. Premiums of up to $250 or $300 take a huge dent out of our paychecks every month. But luckily we can deduct these expenses if they exceed 10% of your salary. This also includes out-of-pocket expenses for doctor visits, dental procedures, and so on. I recently had to pay around $1,500 for a dental surgery, on top of my $3,000/year insurance premiums. If I have to get much more done this year, I could possibly reach that 10% floor.
Children and Dependents
Much like writing off a babysitter for volunteer work, you can also deduct about 20% to 35% of costs associated with hiring care for your child or dependant, up to $3,000 per kiddo.
401(k) and IRA Contributions
401(k)s and IRAs are awesome. They both allow you to save for retirement in tax-efficient ways. Especially since you can deduct all contributions from your income. For 401(k)s you can contribute up to $18,000 per year and $5,500 for IRAs (both Roth and Traditional). If you want to learn more about Roth IRAs and investing to retire a decade or more earlier, read this article where I break down the steps and logic on getting there.
Student Loan Interest
Every year, you can deduct up to $2,500 in student loan interest. Just like with mortgage interest, this includes only the interest, not the payments themselves.
Lifetime Learning Credit
The government really likes it when we learn more. Something about the economy and prosperity of the nation. Because of that, they offer a tax credit for 20% of the first $10,000 of qualified tuition and education expenses against your total tax liability. The difference here is that a tax credit is a one-to-one amount that you will receive back; as opposed to a tax deduction, which only reduces your total taxable income.
Teachers have one of the most important jobs of anyone. Unfortunately, they often have to buy things out of pocket that their students might need. Teachers from K-12 are allowed to deduct up to $250 worth of school supplies from their income. It isn't a huge amount, but you don't have to itemize each box of crayons.
If you're between jobs, keep track of expenses related to the job hunt! If these expenses surpass 2% of your gross income, you can start deducting. This includes mileage driving to job interviews, costs of printing resumes, maybe even a percentage of your internet and phone bills.
Job Expenses (Standard to Bizarre)
Most people know that you can deduct things that you buy and use for work. If you buy a laptop and use it 100% for work, you can deduct the whole thing. If you use it half for work and half for plan, you can, well, deduct half the cost of it. But it doesn't stop there. Some people have written off bizarre items that proved to truly be job-related: a junkyard owner could deduct the cost of cat food since the stray cats keep mice and rats away. Or a bodybuilder could deduct body oil used in an official competition.
Not to mention people who work in advertising deducting Netlix, Hulu, and Amazon Prime. :)
This is a tricky one, but well worth it. You can deduct a percentage of all your home expenses based on the size of your home office. If that area is 1/5 the total size of your house, you can deduct that much from your insurance, bills, repairs, mortgage, and depreciation. This is crucial since the self-employed get hit with heavier taxes generally.
Now get to it! You only have until this Wednesday, April 15th!