Since the coronavirus pandemic took control of the world, folks are seeking strategies to manage their money during the pandemic. Appropriate budgeting, investing, and side hustles can be great ways to save money, but they’re not the only methods you should consider. Tax deductions are a commonly overlooked way to save money at the end of the year.
For ideas that could help you save money on tax deductions, keep reading!
What are tax deductions and tax credits?
First thing first, what is a tax deduction?
Simply put, tax deductions reduce the total income that the government uses to calculate how much you should pay in taxes. If your income is calculated to be lower because of a tax deduction, you end up paying less at the end of the year.
There are two different types of tax deductions in most countries: standard deductions or itemized deductions.
In a standard deduction, you get a flat reduction on your standard gross income. Usually, this amount is determined using a few factors like the size of your household, whether or not you’re married, and your tax bracket.
For an itemized deduction, you have to prove that the government should provide you with particular deductions. This requires more work (think hunting down receipts and filling out lots of forms), but for some folks, it can save them a lot more money.
Read also: Are you losing money to dividend tax?
Tax credits are similar to tax deductions, but work a little differently. While a deduction reduces the income your government can tax, a tax credit reduces the amount of taxes you have to pay (without affecting what the government sees as your income).
10 tax deductions and credits you should consider
1. Student loan deduction
Do you have student loan debt? When tax season rolls around, be sure to calculate how much debt you’ve accrued and if you’ve paid interest on your loans–it could end up saving you money!
If you’ve paid off any of the interest on your student loans during the past year, you can use that as a tax deduction. You may be able to save over $2,000!
2. Child or dependent care tax credit
If you have children or other folks who depend on you financially (elderly parents, disabled relatives, etc.). You can often get a tax deduction proportional to about 30% of the cost of daycare and other expenses. This tax deduction may save you up to $6,000 per year depending on the number of dependents you have!
3. Medical (and dental) expenses
Especially with the coronavirus pandemic in full swing, you’ll want to review this category. Medical and dental expenses can be used as a tax deduction in many situations.
If you had to pay for medical expenses that were not reimbursed under your insurance, you can see if they qualify as a tax deduction. If they do, you may be able to get a deduction worth over 7% of your total income.
This could help you save a lot of money in the long run!
4. Charitable donations
Many folks have donated to those hit hardest by the pandemic this year. If you’re one of them, keep track of these donations–your charity may also help you out at the end of the year.
Whether you make financial donations or give goods to others, your charity may count as a tax deduction that could add up to hundreds of dollars.
5. Home office deduction
More folks than ever are stuck home working, but there’s a bright side to this! If you dedicate a particular space exclusively or mostly to your job, you can get a hefty home office deduction. You can write off a portion of your rent, utilities, mortgage taxes, and other fees at the end of the year.
How much you can save depends a lot on your individual situation, but make sure to investigate the specifics of your country’s home office tax deduction opportunities to save.
6. American Opportunity Tax Credit
If you live in the US and have invested money in education during the past year, you’ll want to investigate the American Opportunity Tax Credit. This credit allows you to get up to $2,500 back on supplies like books, supplies, tuition, and more.
This tax break can even work if you had zero income over the past year! Unfortunately, you won’t be able to take transportation or living expenses into account for this credit, but it can still help you save during tax season.
7. Lifetime learning credit
Like the American Opportunity Tax Credit, the Lifetime Learning Credit can save you around $2,000 for education-related expenses. The benefit associated with this tax break is that it’s applicable to anyone at any level of education, not just undergraduate students and their parents.
8. Adoption credit
During the pandemic, many families are changing. If you adopted a child over the last year, be sure to take into account the adoption credit when filing your taxes.
Many governments recognize that welcoming a new child into your family can be expensive. In the US, for example, you can get a credit of nearly $15,000 for qualified expenses.
9. Savers credit
Do you have an IRA? How about a 401k, 403b, or other retirement savings plan? If you do, take note of this credit when it comes time to file your taxes–it could help you save.
Depending on where you live and how much you contributed to your retirement plan over the past year, you might be able to save $2,000 or more! Getting money back for saving? Sign me up!
10. Reinvested dividends
Reinvested dividends technically aren’t a tax deduction, but since your friends at FlexAcademy believe that investing is important no matter what your tax bracket is, we wanted to mention it.
If you reinvest your dividends in, say, a mutual fund, you increase your tax basis. Remember to include these calculations when you do your taxes in order to avoid overpaying at the end of the year!
If you’re able to save money using tax deductions and credits, make sure to plan what to do with that extra money. Giving your tax savings a purpose before you receive them can help you make the most of them by reinvesting and multiplying your money.
For more ideas on what to do with your tax savings, check out the rest of the FlexAcademy library!