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Maximize Your Tax Savings with These Popular Deductions and Credits

Tax season can be a stressful time, but understanding the various deductions and credits available to you can significantly reduce your tax liability. At O1ne Mortgage, we not only help you secure the best mortgage rates but also guide you through financial strategies to maximize your savings. Call us at 213-732-3074 for any mortgage service needs.

What Are Tax Deductions?

Tax deductions are qualifying expenses, charity donations, or losses that the IRS allows you to subtract from your taxable income, thereby lowering your tax bill. These deductions can be itemized individually on your tax return.

Tax Credit vs. Tax Deduction

A tax deduction reduces your tax liability by subtracting certain expenses or losses from your taxable income. Less taxable income translates to a lower tax bill. On the other hand, tax credits lower your tax bill dollar for dollar. For example, a $20,000 tax credit reduces your tax bill by $20,000, making it more valuable than a $20,000 tax deduction.

How Do You Claim Tax Deductions?

Tax preparation software typically automates this process for you. If you’re filing a paper return, use IRS Form 1040 as your starting point. Here’s how to claim tax deductions:

• Claim adjustments to income, including IRA and HSA contributions, educator expenses, and student loan interest, on Schedule 1.
• Itemize deductions on Schedule A. You’ll need to document your deductible expenses and may need to submit additional forms.
• Choose the standard deduction (if you aren’t itemizing) on line 12, Form 1040. If you claim the standard deduction, you can still claim adjustments to income and tax credits; however, you can’t itemize.

17 Popular Tax Deductions and Credits

1. Mortgage Interest Deduction

All or part of the interest you pay on your mortgage may be tax-deductible. The mortgage interest deduction only applies to the first $750,000 in mortgage debt on your primary or second residence. You can deduct interest from a mortgage or home equity loan, but the loan must be used to buy, build, or substantially improve your property.

2. State and Local Taxes

You may deduct up to $10,000 of taxes paid to state, local, and foreign governments ($5,000 if you’re married filing separately). Eligible taxes include state, local, and foreign income taxes, general sales taxes, property taxes, and personal property taxes.

3. Charity Donation Deduction

Both cash and noncash charitable donations are tax-deductible. Be sure to follow IRS guidelines to determine which charities qualify, how to value noncash donations, and how to document your donations.

4. Medical Expense Deduction

Out-of-pocket health care expenses that exceed 7.5% of your adjusted gross income for the year may be tax-deductible. Eligible expenses include health insurance premiums, insurance copays, dental care, and alternative treatments like acupuncture.

5. Disaster, Casualty, and Theft Loss Deduction

If your property is damaged, destroyed, or lost in a federally declared disaster, a portion of your loss may be tax-deductible. You may also claim a loss for stolen property, but you can’t include losses reimbursed by insurance.

6. Self-Employment Expense Deductions

Contractors, gig workers, and self-employed individuals may deduct business expenses including equipment, supplies, health insurance premiums, and home office expenses. Self-employed people may also deduct half of their self-employment tax from their taxable income.

7. Adjustments to Income

The self-employment tax deduction is one of many adjustments to income that reduce your income before accounting for any itemized or standard deductions. Other examples include deductible contributions to traditional IRAs and HSAs, alimony paid, student loan interest, and educator expenses.

8. Child Tax Credit

You may qualify for a child tax credit of up to $2,000 per child under age 17 who qualifies as a dependent on your tax return. To receive the full credit, your income must be $200,000 or less ($400,000 or less if filing jointly).

9. Child and Dependent Care Tax Credit

If you pay for child or dependent care so you can work or look for work, you may be eligible for a child and dependent care tax credit of 20% to 35% of your care expenses. The credit tops out at $3,000 worth of care for a single dependent or $6,000 for two or more dependents.

10. American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) lets you deduct up to $2,500 in qualified college expenses for an eligible student in their first four years of higher education. To claim the full credit, your marginal adjusted gross income must be less than $80,000 if you’re single or $160,000 if married filing jointly.

11. Lifetime Learning Credit

Claim a credit of up to $2,000 per tax return for eligible expenses related to undergraduate, graduate, and professional degree courses. The credit is equal to 20% of the first $10,000 in qualified education expenses.

12. Earned Income Tax Credit

The earned income tax credit (EITC) allows working people and families with limited incomes to lower their tax bills with a tax credit based on income, filing status, and the number of qualifying children. For the 2023 tax year, the maximum credit was $7,430 for families with three or more qualifying children.

13. Saver’s Credit

The Credit for Qualified Retirement Savings, or saver’s credit, offers an incentive for low- and moderate-income taxpayers to save for retirement in IRAs, 401(k)s, and other workplace retirement plans. The maximum credit is $1,000 ($2,000 for married couples).

14. Energy Efficient Home Improvement Credit

Claim a tax credit of up to $3,200 for qualified energy efficiency improvements, residential energy property expenses, and home energy audits. The credit is for 30% of expenses you incur for qualified improvements installed in 2023 or later.

15. Residential Clean Energy Tax Credit

If you install renewable energy equipment at your home between now and 2032, you may be eligible to claim a credit for 30% of your costs for solar, wind, geothermal, fuel cell, or battery storage technology.

16. Clean Vehicle Tax Credits

You can claim a tax credit of up to $7,500 when you purchase a qualifying new electric vehicle (EV) or fuel cell electric vehicle (FCEV), or up to $4,000 when you buy an eligible used EV or FCEV.

The Bottom Line

These are some of the most popular tax deductions and credits, but they are by no means the full list. For more detailed information, consult IRS publications or a seasoned tax preparer. At O1ne Mortgage, we are committed to helping you navigate your financial journey. For any mortgage service needs, call us at 213-732-3074 and let us assist you in achieving your financial goals.

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