Most people are fairly familiar with business tax deductions and investment deductions, but since personal tax deductions are fairly strict, many people choose not to bother. You can save a bundle, however, if you understand your options with personal tax deductions. Having an experienced CPA in your corner is a good start, but if you aren’t inclined to seek professional help with your taxes, you’ll need to conduct your own research. Following are the top six personal tax deductions that you might want to consider.
Mortgage Interest and Property Taxes Although you can’t deduct your mortgage from your income taxes, you can deduct the interest you pay on that mortgage. In order to qualify for this personal tax deduction, you must be able to prove that you have a current mortgage with a lender and that you pay a certain interest rate. At the end of every tax year, you can add up the amount of interest you’ve paid thus far and deduct that amount from your taxes.
To protect yourself, make sure to save any documentation that pertains to your mortgage, including canceled checks, correspondence with your mortgage lender and any information regarding late payments. If you aren’t diligent about meeting your financial obligations, you may not qualify for this personal tax deduction.
Donations to Charity This is one of the personal tax deductions that often gets people into trouble. The only way that you can deduct donations to charity is if they are approved for tax-deductible donations. Before you write a check or hand over your credit card, make sure you’ve seen proof that you can deduct that amount from your taxes. Request a receipt and you’ll have all the proof you need.
Remember that when it comes to personal tax deductions, you’ll need to be able to provide proof of a charitable donation in the event that you are audited. Don’t make donations over the phone with your credit card — there are far too many scams to trust this method — and make sure you have seen proof that they are a valid charity.
Medical Expenses Most people don’t qualify for personal tax deductions for the medical expenses, but if your payout with insurance (or without if you don’t have insurance) exceeds 7.5% of your income, you might be eligible. In order to qualify for this, you’ll need to be able to show proof of medical bills and, in most cases, you’ll also need to demonstrate that the work was necessary. Cosmetic surgery, for example, isn’t usually covered here unless it is used to correct a deformity.
Again, documentation is important with medical expenses as with all personal tax deductions. Save copies of your bills in a separate file for tax purposes and make sure that your calculations are correct. if you aren’t sure how to calculate this type of deduction, hire a CPA.
Children or Dependent Care In some cases, you may be able to claim a personal tax deduction in the way of child- or dependent-care. There are limits on how much you can deduct (it varies from year to year), so you’ll need to find out exactly what percentage of dependent care will qualify. You might only be able to deduct a small percentage, but as they say, every cent counts.
You should be aware that when it comes to this personal tax deduction, you can’t deduct any funds for which you are compensated by your employer. In other words, if you are reimbursed for child care through your employer, those funds are not tax-deductible. How much you can deduct will depend on your income, and is typically between twenty-five and thirty-five percent of what you actually pay out.
Student Loan Interest If you are still paying off student loans, then you know they can drain you financially. The good news is that the interest you pay on those loans might be tax-deductible if you make less than a certain amount each year (currently $65,000 for single tax payers). Remember that this personal tax deduction doesn’t apply to the principal of the loan itself, but for the interest paid on that loan. You must be current in your payments in order to qualify, so make sure you have documented proof that you have been paying off your student loans..
Work-Related Expenses This is another tricky personal tax deduction and should be handled with care. If you incur work-related expenses that aren’t reimbursed by your employer, you may be able to deduct them. Examples include training for your job, materials needed to complete your job and continuing education. You may also be eligible to deduct expenses related to job hunting, such as mileage and materials.
This is not a comprehensive list of personal tax deductions, but it should be enough to get you started. Check out irs.gov to learn more about potential deductions and don’t forget to consult with a tax professional if you have any questions.
