Don’t Overlook the 5 Most Common Tax Deductions [Updated]
February 19, 2013 : Miranda Marquit - Guest Contributor
Editor’s Note: This post was updated on August 12, 2016.
One of the ways you can reduce your tax liability is to decrease your taxable income. And of course, you can do this by taking advantage of tax deductions. There are deductions you can take “above the line” that reduce your adjusted gross income, and there are other deductions you can take later through itemizing. If you are wondering whether or not you qualify for one, here are five common deductions taxpayers can use:
1. Retirement Contributions
If you contribute to a tax-advantaged traditional retirement account (IRA, 401(k), etc.), you may owe less in taxes than if you did not contribute. You might not even realize you are receiving the deduction if you have your contribution automatically made in conjunction with your paycheck. The money comes out before the taxes do, thereby reducing your taxable income.
Even if you have an IRA and contribute without an employer’s help, you can still get a tax benefit. Your traditional IRA contribution is an “above the line” deduction, meaning you don’t have to itemize in order to take advantage of it.
2. Charitable Donations
You will need to itemize your deductions if you want to deduct your charitable donations. Many people find that it’s worth it to itemize these deductions – particularly if you give regularly to your church.
It’s also possible to deduct the current market value of goods that you donate to charity. Make sure you get a receipt for your donations, whether they are cash or goods. And don’t forget to keep track of your mileage if you drive on behalf of a charity; that’s tax-deductible, too.
3. Mortgage Interest Deduction
If you own a home, and you itemize, you can deduct the interest that you pay on your mortgage. It’s also possible to deduct refinancing points and other aspects of your home ownership costs, including property taxes.
Oftentimes, if you add up the amount you have paid in mortgage interest for the year, and combine it with the amount of your charitable donations, you may reach a number that exceeds the standard deduction, making it worth it to itemize.
4. Interest on College Education Costs
Thanks to the recent fiscal cliff tax agreement, it’s possible to deduct your student loan interest indefinitely. Not only can you deduct the interest you pay on student loans, but you can also deduct the cost of tuition and fees.
These education deductions are “above the line,” so you don’t have to itemize in order to take advantage of them, but you need to make below a certain level of income to qualify.
5. Self-Employment Expenses
With home businesses becoming more popular and with a number of Americans starting side hustles, it’s no surprise that self-employment expenses are also becoming more popular. If you pay for your own health insurance, that counts as an “above the line” deduction. On top of that, you can deduct expenses related to your business, including Internet costs, office supplies, advertising, and travel.
Honorable Mention: HSA Contributions
Health Savings Accounts are gaining in popularity as health care costs rise and as more employers seek to put more of the cost of insurance on employees. Your HSA contributions are tax-deductible. Not only does the money grow tax-free when you use it for qualified health care costs, but you can use your contributions to reduce your tax liability to boot!
Remember to Document!
No matter your tax deduction, be sure to properly document your situation. This is especially true with self-employment expenses and with charitable donations. Keep receipts to back you up. Before you take a deduction, make sure you can prove that you are entitled to it, and consider consulting a tax professional about your eligibility.