First comes the New Year, then comes taxes! Like the diligent citizens that you are, taxes are regularly taken from your check all year; with the hopes of getting some of that money back when you file your returns.
With the April 15th tax deadline approaching, the CGS Team found it suitable to give you as much information on taxes as possible!
If you haven’t already, refer to the Prepping For Taxes article to get you on the right track. This week’s Finance 101 article will cover tax credits and deductions. The CGS Team is going to provide you with some common types of tax credits and deductions to help maximize your return. Get ready to take some notes, City Girls!
Tax Credits vs. Tax Deductions
There is a huge difference between a tax credit and a tax deduction. A tax credit is a monetary credit that is subtracted directly from the amount of taxes you own. Unlike tax deductions, tax credits directly affect your total amount due in your return.
The value of the tax credit depends on what the credit is actually being provided for. Certain types of tax credits are granted to individuals or businesses in specific locations, classifications or industries. A tax deduction is a reduction of your total taxable income.
Everyone is entitled to a standard (or itemized) deduction and a personal exemption. However if you earned over $376,700 as a single filer or $427,550 as a married filer, personal exemptions are not available for use.
The personal exemption amount is $3,950. An itemized deduction is used in place of the standard deduction when there additional expenses (work or non-work related) incurred through the year.
If your itemized deductions are not greater than the standard deduction amount, then it is best to use the standard deduction. Depending on how you file effects your standard deduction.
Common Tax Credits
Since tax credits directly affect the amount of tax you will pay (or get back), we thought it was fitting to begin with some of the most common tax credits.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) applies to low income employees (self-employed included) that have children that pass the age, relationship, location, joint return tests.
The EITC also applies to people older than 25 but younger than 65, not filing as “married filing separately,” U.S. citizens, and not be claimed as a dependent on another return.
The ranges of the credit for 2014 are $496-$6,143.
Child Tax Credit
If you have 1 or more children who are under the age of 17, claimed as a dependent by you, have lived with you for more than half of the year, and they are a U.S. citizen, then you may be entitled to the Child Tax Credit.
If you are single with income of less than $75,000, married filing separately with less than $55,000 or married filing together with less than $110,000 then you are eligible for $1,000 per child, up to 4 children. For more information, visit turbotax.com.
Mortgage Interest Credit
Do you own a home? If you pay interest every month, then you qualify for the Mortgage Interest Credit. The credit applies to your main home, which can include: house, condo, trailer, RV or anything with sleeping, cooking, and toilet facilities.
The credit also applies to a second home, as long as you spend at least 14 days out of the year there. The tax credit allows you to claim up to 20% of the interest paid during the year.
American Opportunity Tax Credit
Every college student MUST take advantage of the American Opportunity Tax Credit (AOTC)! If you are in your first four years of college, with no felony charges, going to school at least half time, and have not claimed this credit more than four times (four years) then you are eligible for the $2,500 credit amount.
Also note that to get the full credit, your income cannot exceed $80,000 to qualify.
Lifelong Learning Credit
If you have finished your first four years of school, but are still pursuing additional education, then you may qualify for the Lifelong Learning Credit (LLC). There is no end date for this credit. As long as you are enrolled in an eligible institution, you can receive a credit of up to $2,000 per tax return.
If you are a low income worker, over the age of 18, not enrolled in school and you have contributed at least $2,000 into an IRA, 401k or other retirement plan, then you may be eligible for the Saver’s Credit.
The 2014 income requirements for the credit were less than $30,000 for filing single, or less than $60,000 for filing as married filing jointly. The credit will allow you to receive up to $1,000 for single or $2,000 for married. For more information, visit irs.gov.
Deductions are extra expenses that were acquired through the year for work related items, charity donations, or theft losses. Make sure you have all of your receipts!
Remember, you should only use itemized deductions if the expenses incurred are greater than the standard deduction amount you are already entitled to. If you are choosing to use the itemized deductions in place of the standard deduction, here are some common items that can be used:
1. Medical Expenses that totaled over 7.5% of your gross income
2. Moving Expenses associated with relocation for work
3. Mileage & Unreimbursed Employee Expenses
4. Charitable Contributions
5. Casualty and Theft Losses
Also, check out the article Tax Deductions to Take Advantage Of for more information. The options are endless for deductions. If you know you plan to go this route, visit TurboTax.com to read up on other deductions you may be able to take advantage of.
Related: Understanding Your Tax Withholdings
That was a lot of information ladies, but it pays to be knowledgeable. If you were eligible but not previously taking advantage of any of those tax credits or deductions, then shame on your tax preparer! Don’t let lack of knowledge stop you from getting more money back (or paying less)!
Are there any other tax credits or deductions that you have used before? Please share with the community so that we can all learn from each other’s experiences!