Tax season is rapidly approaching and the next few months should involve planning to take advantage of as many taxable income write-offs and/or tax credits as possible. The term write-off often refers to a deduction from taxable income, whereas a tax credit refers to a reduction of your tax liability. 

State Income or Sales Tax

Taxpayers who itemize deductions have the option to choose either to deduct their state income or state sales tax payments. While state income tax often yields a greater deduction for many people, a taxpayer should calculate whether a sales tax deduction may be the better choice for those who make a large purchase in the past year such as a vehicle or boat. 

Medical Expenses

The IRS allows deductions for mileage and other travel expenses that are associated with your medical visits. In addition home improvements that were made for medical reasons such as a wheelchair ramp, installing support bars, etc. are deductible.

Bear in mind that starting in the 2019 tax year, only costs exceeding 10% of a person’s adjusted gross income are deductible and any increase in the value of your home that comes as a result of the medical-related renovations must be subtracted from the deductible amount. 

Mortgage Points and Property Taxes

Property taxes are a major deduction for homeowners, although the tax break is subject to a $10,000 total federal cap for state income, sales, and property taxes. Mortgage points, which are prepaid interest, paid as part of closing costs on a home sale may also be deducted.

Starting in 2019, Virginia will allow those that itemize to claim real estate taxes and other property taxes without regard to the $10,000 federal limit.

Non-cash Charitable Giving

Many taxpayers are aware that cash gifts to charities are deductible, but not all taxpayers know that other charitable gifts are deductible as well. Donating goods to a local thrift store, for example, can be deductible as can expenses associated with volunteer work. IRS requires a receipt to be kept showing the type of goods, the name of the thrift store and the thrift store estimated donated value. Any cash or non-cash donations over $250 must have a written acknowledgment from the charity. An appraisal is usually required for any non-cash donation other than marketable securities with a value greater than $5,000. 

Taxpayers can also deduct 14 cents per mile driven to and from volunteer work for nonprofit organizations and any parking expenses or tolls paid as a direct result of this volunteerism. You can’t, however, deduct your time or personal expenses incurred from volunteer work. 

College Tuition and Student Loan Interest

There are tax deductions and credits that can offset the cost of college: the American Opportunity Credit, the Lifetime Learning Credit, and a deduction for student loan interest. Education tax credits and deductions can be claimed by a student as long as he or she has earned income and is no longer listed as a dependent on a parent’s tax return. 

However, parents usually pay taxes at a higher tax bracket then college students and usually parents are still supporting the student therefore it would not make sense to have the student take the deduction unless they are self-supporting. In addition, since the tuition credits are limited to adjusted gross income and taxable income limits, the best solution is to calculate using both scenarios. 

You can claim up to $2,500 per eligible student, per year. The credit covers 100% of the first $2,500 of qualified tuition, required fees, and qualified expenses, plus 25% of the next $2,000. 40% of the credit is refundable, so you may receive $1,000 per eligible student as a tax refund even if you owe no tax.

Child and Dependent Care Tax Credit

Working parents may be eligible for a child and dependent care tax credit but it’s important that you submit the proper documentation to justify the deduction or credit. In addition, similar costs to care for an incapacitated spouse or parent so the taxpayer can work can be used to calculate the tax credit.

Earned Income Tax Credit

This is a refundable credit which means that families can receive a check from the government even if they haven’t paid taxes. In order to be eligible for this credit, people must earn at least $1 and have at least one qualifying child. The amount of the earned income tax credit benefit depends on a recipient’s income and number of children.

In our next article, we will discuss tax planning tips for businesses.