Tax Deductions Guide 2020
Updated: Jun 10
What is a tax deduction?
A tax deduction helps you to lower taxable income, which results in reduces tax liability. The calculation will involve subtracting the amount of the tax deduction from your income, making your taxable income lower.
If you want to pay the least amount of income tax each year, then it may be helpful to start doing some tax planning. Don’t worry - you don’t need an accounting degree to make some smart tax decisions. A little planning goes a long way.
Step 1: Start a filing system
Start a filing system to organize your documents. Any successful tax planning strategy requires you to maintain records of all transactions and receipts that may affect your tax return. This helps to keep track of important documents and avoid forgetting about transactions that occur months before the tax filing deadline.
Step 2: Understand tax deduction requirements
Before you get too far along in the tax year, you should evaluate all available IRS deductions and the requirements to claim them. By doing this beforehand, you can be proactive in preparing to claim a deduction at the end of the year.
For example, if you know you are heading back to school soon and will need a loan to pay your tuition, it may be better to take out a student loan rather than using a credit card. This is because you can deduct the interest that accrues on a student loan, but not on a credit card, even if used for educational purposes.
Step 3: Evaluate the tax credits offered
Tax credits offer a significant opportunity to save money on income taxes since they reduce your actual tax bill on a dollar-for-dollar basis. The types of tax credits offered each year change more frequently than deductions. Credits are often available for a limited time and cover specific types of expenses.
For example, the federal government offers taxpayers a credit that covers 30 percent of an unlimited amount of costs to purchase and install solar-energy equipment such as energy-producing solar panels. As long as the product includes a certification by the manufacturer that it satisfies government requirements, you can claim the credit.
Therefore, if you are planning to install solar panels on your roof this year, but are unaware of the credit, you could miss out on an opportunity to save money. And if you find out about the credit after you install the panels, you run the risk of being ineligible for the credit if your panels do not include a manufacturer’s certification. By knowing the requirements before you purchase the panels, you can ensure you are eligible for the credit.
Step 4: Use an IRA
Use an Individual Retirement Account (IRA) instead of a savings account. Many taxpayers put their savings into a typical bank account that earns taxable interest. However, you can avoid paying tax on the interest each year by depositing money into a traditional IRA account instead of where the interest will accumulate tax-free. When you do, you are also eligible to claim a deduction each year for a certain amount of contributions you make to the account.
Step 5: Many More
Student loan interest deduction
American Opportunity Tax Credit
Lifetime Learning Credit
Child and dependent care tax credit
Child tax credit
Earned Income Tax Credit
Charitable donations deduction
Medical expenses deduction
Deduction for state and local taxes
Mortgage interest deduction
Gambling loss deduction
IRA contributions deduction
401(k) contributions deduction
Health Savings Account contributions deduction
Self-employment expenses deduction
Home office deduction
Educator expenses deduction
Residential energy credit
In summary, good tax planning will help you to lower taxable income and reduces tax liability. Contact us to schedule a tax planning session!
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