If you missed my post last week on Understanding Tax Deductions then I’d recommend you start there.
I certainly realize that taxes can be confusing, and I give all of the credit in the world to people that file their taxes on their own (the old-school, hand-written way).
If you’ve yet to file your taxes and if all of this stuff confuses you, then I’d highly encourage you to use an online tax software such as TurboTax.
Adjusted Gross Income (AGI) = Gross Income – “Above the line Deductions”
Taxable Income = Adjusted Gross Income (AGI) – Personal Exemptions (claim the Standard Deduction or Itemize)
Above the line deductions are deductions than you can claim EVEN if you only use the Standard Deduction as your personal exemption. This means you DO NOT have to itemize and can still lower your tax burden!
Technically, to come up with your Taxable income, “above the line” deductions are subtracted from your Gross Income, and then your personal exemptions are subtracted from that (Standard Deduction or via Itemization). As detailed in the Calculations above.
What Are Some of the Common Above the Line Deductions?
While many of these may not apply to your situation, these do apply for a small percentage of Americans. If any of these apply to you then it’s wise that you take advantage of these deductions even if you cannot itemize!
If you’re unsure whether or not you should itemize (or just confused by the concept), then please check out my last post on Understanding Taxes: Tax Deductions.
If you know that you have more deductions (write-offs) than what is given to you via the Standard Deduction ($5,800 for SINGLE and $11,600 for Married Filing Jointly), then it’s wise that you take the time and itemize on your tax return.
Itemizing simply is the process for tallying up all of your deductions and claiming them on your taxes. Again, as I mentioned in the Understanding Tax Deductions post, you cannot itemize if you do not have more to claim than the Standard Deduction allows.
*Important Note: most of these deductions will come with the appropriate tax form that you’ll need when filing your taxes. Each lender or organization is typically responsible for sending you the proper forms.
Common Itemized Deductions:
While I’m not going to spend much time on other “credits,” the Child Tax Credit and American Opportunity Credit will be common tax-breaks that many Americans will receive.
A tax credit is different than a deduction in the fact that you get a dollar-for-dollar reduction in the amount of taxes you owe (so credits are better than deductions).
While there are some rules that apply to the Child Tax Credit, all you need to know for the basics is that if you don’t earn too much (or too little) and if your child isn’t too old (and you’re taking care of them), then you’ll receive a $1,000 tax credit for each qualified child.
If your income is too low to fully take advantage of the Child Tax Credit, then you may be eligible for the Additional Child Tax Credit.
The American Opportunity Credit is tax credit of up to $2500 for college students (and parents if they pay for the cost).
This credit applies to a student that paid for higher education tuition, fees, and course materials.
There are a few stipulations to be eligible for the credit:
As always, all of these deductions and credits may have other qualifications so it’s wise to seek a competent tax professional when filing your taxes.
There is no doubt that taxes are confusing, but finding somebody (or something – i.e. TurboTax or H&R Block online tax software) that you can trust and that is knowledgeable will help make filing taxes an easy process.
Picture by David Castillo Dominici.
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