Everyone wants to save money on taxes, but not everyone knows the best way to do it. One of the simplest ways to save money on your taxes is to take advantage of common tax deductions that are available to you. Here are some easy ways to save on common tax deductions.
1. Take Advantage of the Standard Deduction
The standard deduction is a flat amount that the government allows you to deduct from your taxable income based on your filing status. For 2021, the standard deduction is:
- $12,550 for single filers
- $25,100 for married couples filing jointly
- $18,800 for heads of household
If your itemized deductions (discussed below) are less than the standard deduction for your filing status, taking the standard deduction could be the easier and more financially beneficial avenue for you.
2. Itemize Your Deductions
If your itemized deductions are greater than the standard deduction for your filing status, you should itemize your deductions. This will allow you to reduce your taxable income by the sum of your itemized deductions.
Some examples of commonly itemized deductions include:
- Mortgage interest
- State and local income, sales, and property taxes
- Charitable contributions
- Medical and dental expenses
- Casualty and theft losses
Keep in mind that some itemized deductions have a limit or are subject to certain restrictions, so it’s best to consult a tax professional to ensure you’re getting the most out of your deductions.
3. Contribute to a Retirement Account
Contributing to a traditional IRA or a 401(k) plan can help reduce your taxable income. For 2021, you can contribute up to $19,500 to a 401(k) plan and up to $6,000 to an IRA. If you’re aged 50 and above, you can also make additional catch-up contributions, which can further lower your taxable income.
4. Deduct Student Loan Interest
If you paid interest on your student loans during the year, you can deduct up to $2,500 of that interest on your tax return. This deduction is available even if you don’t itemize your deductions, which makes it an easy way to save on your taxes.
5. Deduct Job-Search Expenses
If you were looking for a job during the year, you can deduct some of the expenses you incurred, such as transportation costs, resume preparation fees, and job-placement agency fees. However, these expenses must exceed 2% of your adjusted gross income to be deductible.
6. Deduct Home Office Expenses
If you work from home and have a dedicated home office space, you may be able to deduct some of your home office expenses. The amount you can deduct will depend on the amount of space your home office takes up and the percentage of your home that is used for business purposes.
7. Deduct Self-Employment Expenses
If you’re self-employed, you can deduct certain expenses related to running your business, such as office supplies, advertising expenses, and business-related travel expenses. Keep detailed records of all your business expenses throughout the year to ensure you’re maximizing your deductions.
8. Deduct Health Savings Account (HSA) Contributions
If you have a high-deductible health plan, you may be able to contribute to an HSA. HSA contributions are tax-deductible, and the money in the account can be used to pay for qualified medical expenses tax-free.
9. Deduct Moving Expenses
If you moved for a new job during the year, you may be able to deduct some of your moving expenses, such as transportation costs and storage fees. However, there are certain requirements that must be met for these expenses to be deductible.
10. Deduct State Sales Taxes
If you live in a state with no income tax, you can deduct state sales taxes instead. This can be a valuable deduction, especially if you made a big-ticket purchase during the year.
FAQs
1. Can I take both the standard deduction and itemized deductions?
No, you can only take one or the other. You should choose the option that allows for the most tax savings.
2. How do I know if I should itemize my deductions?
If your itemized deductions are greater than the standard deduction for your filing status, you should itemize your deductions.
3. What is the difference between a traditional IRA and a Roth IRA?
A traditional IRA allows you to make tax-deductible contributions, which can reduce your taxable income. A Roth IRA, on the other hand, does not allow for tax-deductible contributions, but the money in the account can be withdrawn tax-free in retirement.
4. Can I deduct all of my self-employment expenses?
No, only certain expenses related to running your business are deductible. Keep detailed records of all your business expenses and consult a tax professional to determine which expenses you can deduct.
5. Are there income limits for deducting student loan interest?
Yes, the deduction begins to phase out for single filers with a modified adjusted gross income (MAGI) of $70,000 and joint filers with a MAGI of $140,000.
Conclusion
Taking advantage of common tax deductions can be an easy way to save money on your taxes. Whether you choose to take the standard deduction or itemize your deductions, contribute to a retirement account, or deduct job-search expenses, it’s important to keep accurate records and consult a tax professional to ensure you’re getting the most out of your deductions.
