The start of a new year feels like a refresh for many people, and when tax time rolls around. Having to dissect your previous years’ purchases and financial choices for the purposes of filing your taxes can be daunting regardless of if you hire out or do them yourself. Either one commonality exists across the board, everyone wants to know how to avoid paying more than they owe, and how to boost their refund.
While your filing status plays a large role in how the numbers will all shake out, available deductions are a close second. Many opportunities for deductions exist that you may not be aware of and several of the most common ones are often overlooked. If your goal is to come out of tax season with numbers that are balanced in your favor, then taking the extra time to learn about these deductions is crucial. Some of these deductions will require records to be able to qualify, so even if you cannot claim them on these years filing due to a lack of proof, you are now armed with the knowledge of how to keep track of your deductions moving forward and take advantage in years to come.
Home Equity Loans
Whether or not you can deduct the interest paid on your home equity loan depends on when you took out the loan, how much you borrowed, and what you used the funds for. While these requirements are broad once you break them down there are many details to consider. For those who have not yet taken their loan out, but plan to do so and want to make sure that it will fit all the criteria a quick convo with your tax professional, or simple internet search can help get you started.
You can review a guide on home equity loans whether you are looking to take out a home equity loan or simply learn about recent laws or interest rates. That research is going to make it easier to determine how to repay to a preset schedule because you will know the exact details of the loan you select. Some documents that you will need to keep to be able to qualify for this deduction include your mortgage interest statement, statements from additional interest paid (when applicable), and proof of how the funds were used.
Work from Home Expenses
Thanks to the global pandemic, many people are now working from home full time for the first time in their adult life. As a result, many opportunities for tax deductions are overlooked because they have not previously been eligible to receive them. As with any deduction the IRS has criteria that must be met, so just be sure to follow those guidelines as you explore this opportunity.
Common areas that you can examine and potentially receive a break on including your home office, some utilities, homeowner’s insurance, and even property taxes. If you combine these unique breaks with other smart tax reduction hacks you can stand to improve your return total significantly. If you are self-employed or an independent contractor, you are still eligible for certain work from home deductions despite not being considered an employee.
Charitable Contributions
There is a financial incentive to give generously to charitable organizations and it comes in the form of a tax deduction. The purpose of charitable tax deductions is to reduce your taxable income and your tax bill and improving the world around you is the cherry on top. To take a tax deduction for a charitable contribution you will need to forgo the standard deduction in favor of itemized deductions. The purpose of itemizing your deductions is to show that they will individually add up to more than the standard deduction. Your donations likely are going to organizations that serve an issue that you feel passionate about, which is an honorable way to determine how to give. As you are researching and selecting the causes that mean the most to you, check to confirm that they are also either a 501(c)(3) public charity or a private foundation to ensure your contributions will qualify at tax time.
IRA and HSA Contributions
Traditional IRA contributions can significantly lower your taxable income as can pre-tax contributions to a health savings account. One hack to be aware of regarding contributing to a Traditional IRA to reduce your taxable income is timing. You have until the filing deadline to open or contribute to a Traditional IRA for the previous tax year. You can take advantage of this angle by claiming the credit on your return, filing early, and then using your refund to open the account. Since the deadline date is the only one that matters, this process order makes sense for people trying to get creative with their filing.
Health savings account contributions can also be made up until the filing deadline however there are a few more requirements to be aware of regarding this account. You must be enrolled in a health insurance plan that has high deductibles that meet or exceed the IRS’s required amounts. Additionally, that plan must also impose the maximum annual out-of-pocket cost ceilings that meet the IRS’s limitations.