Common Tax Deductions and Credits

Taxes are an essential part of life for most individuals and businesses. Although the process of filing taxes can be overwhelming, knowing the common deductions and credits can help reduce the tax burden. Deductions and credits are ways to reduce taxable income, which can ultimately lower the amount of taxes owed or increase the tax refund. In this article, we will discuss the most common deductions and credits that individuals and businesses should know to maximize their tax benefits.

Deductions and credits

Deductions and credits are two ways to reduce the amount of taxes owed or increase the tax refund. However, they are different in how they work.

What are Deductions?

Deductions are expenses that can be subtracted from your taxable income, which ultimately lowers the amount of taxes you owe. There are two types of deductions: standard deduction and itemized deduction. The standard deduction is a fixed amount that the IRS allows taxpayers to deduct from their taxable income, based on their filing status. Itemized deductions, on the other hand, are a list of eligible expenses that taxpayers can choose to deduct instead of taking the standard deduction. Some common itemized deductions include state and local tax deductions, charitable donations, mortgage interest deductions, and medical expenses deductions.

What are credits?

Credits, on the other hand, are dollar-for-dollar reductions in the amount of taxes owed. This means that if you owe $2,000 in taxes but qualify for a $1,000 tax credit, your tax bill will be reduced to $1,000. There are many different types of tax credits available, each with specific eligibility requirements. Some common tax credits for individuals include the Earned Income Tax Credit (EITC), Child Tax Credit, American Opportunity Tax Credit, Lifetime Learning Credit, and Saver’s Credit. For businesses, common tax credits include the Research and Development Tax Credit, Work Opportunity Tax Credit, Small Business Health Care Tax Credit, and Energy Efficiency Tax Credit.

It’s important to note that not all deductions and credits are available to everyone. Eligibility for deductions and credits may depend on your income level, filing status, and other factors. Additionally, some deductions and credits may have limits or phase-out ranges that reduce their value as income levels increase.

Common deductions for individuals

Common deductions for individuals can help lower taxable income, which can reduce the amount of taxes owed or increase the tax refund. Here are some of the most common deductions that individuals can claim on their tax returns:

1. Standard deduction: The standard deduction is a fixed amount that taxpayers can deduct from their taxable income, based on their filing status. For the tax year 2022, the standard deduction amounts are $12,950 for single filers, $18,650 for heads of household, and $25,900 for married filing jointly.
2. Itemized deduction: Itemized deductions are eligible expenses that taxpayers can choose to deduct instead of taking the standard deduction. Some common itemized deductions include state and local tax deductions, charitable donations, mortgage interest deductions, and medical expenses deductions. To claim itemized deductions, taxpayers must keep records of their expenses and file Schedule A with their tax return.
3. Personal exemptions: Personal exemptions are deductions that taxpayers can claim for themselves, their spouse, and their dependents. However, personal exemptions were eliminated starting in the tax year 2018 due to the Tax Cuts and Jobs Act.
4. State and local tax deductions: Taxpayers can deduct state and local income taxes, sales taxes, and property taxes from their taxable income. However, there is a cap on the total amount of state and local tax deductions that taxpayers can claim, which is $10,000.
5. Charitable donations: Taxpayers can deduct donations made to qualified charitable organizations, up to a certain limit. For cash donations made in the tax year 2022, the limit is 60% of the taxpayer’s adjusted gross income (AGI).
6. Mortgage interest deductions: Taxpayers can deduct interest paid on a mortgage for their primary residence and one other home, up to a certain limit. For mortgages taken out after December 15, 2017, the limit is $750,000.

Common credits for individuals

Common tax credits for individuals can help lower the amount of taxes owed or increase the tax refund. Here are some of the most common tax credits that individuals can claim on their tax returns:

1. Earned Income Tax Credit (EITC): The EITC is a refundable tax credit for low- to moderate-income working individuals and families. The credit amount depends on the taxpayer’s income, filing status, and number of qualifying children. For the tax year 2022, the maximum credit amount ranges from $538 for taxpayers without qualifying children to $6,728 for taxpayers with three or more qualifying children.
2. Child Tax Credit: The Child Tax Credit is a non-refundable tax credit for taxpayers with qualifying children under the age of 18. The credit amount is up to $2,000 per qualifying child, and up to $1,400 of the credit is refundable. The credit amount phases out for higher-income taxpayers.
3. American Opportunity Tax Credit: The American Opportunity Tax Credit (AOTC) is a non-refundable tax credit for taxpayers who pay qualified education expenses for themselves, their spouse, or their dependent. The credit amount is up to $2,500 per eligible student, and up to 40% of the credit is refundable. The credit is available for the first four years of post-secondary education.
4. Lifetime Learning Credit: The Lifetime Learning Credit (LLC) is a non-refundable tax credit for taxpayers who pay qualified education expenses for themselves, their spouse, or their dependent. The credit amount is up to $2,000 per tax return, and there is no limit on the number of years the credit can be claimed.
5. Saver’s Credit: The Saver’s Credit is a non-refundable tax credit for taxpayers who contribute to a retirement account, such as an IRA or 401(k). The credit amount is up to $1,000 for individuals or up to $2,000 for married couples filing jointly, depending on the taxpayer’s income level.

Common deductions for businesses

Common deductions for businesses can help lower taxable income and reduce the amount of taxes owed. Here are some of the most common deductions that businesses can claim on their tax returns:

1. Business expenses: Business expenses are ordinary and necessary expenses that businesses incur in the course of their operations. These may include expenses for supplies, rent, utilities, advertising, travel, and employee wages. Business owners can deduct these expenses on their tax returns, provided that the expenses are reasonable and directly related to the business.
2. Depreciation: Depreciation is the process of deducting the cost of tangible property over its useful life. Businesses can claim a depreciation deduction for assets such as equipment, machinery, buildings, and vehicles. The amount of the depreciation deduction depends on the type of property and the method of depreciation used.
3. Home office deduction: Business owners who work from home may be eligible to deduct a portion of their home expenses, such as rent, utilities, and insurance, as a home office deduction. To claim this deduction, the home office must be used exclusively and regularly for business purposes.
4. Health insurance deduction: Business owners who pay for their own health insurance or provide health insurance to their employees may be eligible to deduct these expenses as a business expense.
5. Retirement plan contributions: Business owners who contribute to a qualified retirement plan, such as a 401(k) or SEP IRA, can deduct these contributions as a business expense.

Common credits for businesses

Common tax credits for businesses can help lower the amount of taxes owed or increase the tax refund. Here are some of the most common tax credits that businesses can claim on their tax returns:

1. Work Opportunity Tax Credit: The Work Opportunity Tax Credit (WOTC) is a federal tax credit that provides an incentive for businesses to hire individuals from targeted groups, such as veterans, ex-felons, and people with disabilities. The credit amount varies depending on the target group and the hours worked by the employee.
2. Research and Development Tax Credit: The Research and Development (R&D) Tax Credit is a federal tax credit that provides an incentive for businesses to invest in research and development activities. The credit amount is based on a percentage of the qualified research expenses incurred by the business.
3. Small Business Health Care Tax Credit: The Small Business Health Care Tax Credit is a federal tax credit that provides an incentive for small businesses to offer health insurance to their employees. The credit amount is based on a percentage of the employer’s premium payments.
4. Disabled Access Credit: The Disabled Access Credit is a federal tax credit that provides an incentive for businesses to make their facilities accessible to people with disabilities. The credit amount is based on a percentage of the qualified expenses incurred by the business.
5. Energy Efficiency Tax Credits: Energy Efficiency Tax Credits are federal tax credits that provide an incentive for businesses to invest in energy-efficient equipment and facilities. The credit amount varies depending on the type of equipment or facility installed and the amount of energy savings achieved.

In conclusion, taxes can be a significant financial burden for individuals and businesses alike, but there are many ways to reduce that burden through tax deductions and credits. By understanding the most common deductions and credits available, taxpayers can take advantage of opportunities to lower their taxable income, reduce their tax liability, and potentially increase their tax refund.

For individuals, common deductions include mortgage interest, charitable contributions, state and local taxes, and medical expenses. Common tax credits include the Earned Income Tax Credit, Child Tax Credit, and American Opportunity Tax Credit. For businesses, common deductions include business expenses, depreciation, home office expenses, retirement plan contributions, and startup costs. Common tax credits include the Work Opportunity Tax Credit, Research and Development Tax Credit, Small Business Health Care Tax Credit, and Energy Efficiency Tax Credits.