Taxes aren’t easy. We can all agree on that, but given that we have to do them let’s make the most of it. If I told you that I would pay you $5,000 for 5 hours of your time would you take it? You might ask, “What’s the catch?” The catch is, you have to actually think about your taxes for a few hours, calculate your deductions, and enter it into your tax software. If you do, your tax refund may increase by $5,000 or more.
What Are Deductions
Now that I have your attention, let’s review what a deduction really is. A deduction is something you did, donated to, or just get for breathing that allows you to not pay taxes on part of your income. Now, I know you may love supporting government spending, but let me explain this in more detail first. If you give $10,000 to a few charities over the course of a year, the government thanks you for doing its work (supporting the common good). The government turns a blind eye and just acts like that $10,000 entered their bank account on payday instead of yours and that they gave the money to the charity instead of you (that’s ok). So instead of making you pay taxes on money you never (sort of) saw, you get to deduct it from your income and only get taxes on what’s remaining.
Types of Deductions
Standard Deduction – since most people either don’t have any money to deduct or are too lazy (I’ll deal with you in a minute) to deduct, the tax laws just assume we all did enough good this past year to deduct $5,700 dollars each.
Itemized Deductions – for those people who do have more than $5,700 in deductions there are Itemized Deductions. This is when you must write down all the money you gave to charity, all the interest paid on your house, and so forth. The good thing is that you can get a decent percentage back on your itemized deductions – even $5,000.
What You Can Deduct
There are countless items you can deduct each year, especially if you work from home. Here are some of the most common courtesy of TurboTax.
- Mortgage Interest, Mortgage Insurance and Property Taxes
- Child Care
- Donations to Charity (includes money, miles, items, and stock)
- Car Registration
- Student Loans and College Expenses
- Medical Expenses
- State Income or Sales Taxes
- Home Business Costs
How Much You Save
Now let’s say you and your lovely spouse each make a round $50K for an even $100K (makes the math easy), you have a crazy three year old, and you own a home. Based on the deductions mentioned above you may deduct some or all of the following.
- $15K you spend on mortgage interest and property taxes
- $3K (max) for daycare since you both work
- $10K you donated to charity (is that too much?)
- $2K for student loans
- $5K for state taxes
- $35K Total!
Since you’re in the 25% tax bracket with that income, you would save a total of $8,750. All the work required for this saving is pulling together a few records.
Keeping Better Track of Deductions Next Year
Phew! Now that you have some dough to go pay off debt or add to savings, you may be wondering how to better keep track of your deductions next year. I highly recommend using ItsDeductible.com or the iDonatedIt app for tracking deductions. The website is integrated with TurboTax and is easy to use. Whenever you make a donation, pay a car registration fee, or have any other deduction worthy expense just jot it down on the website. When tax time comes next year you’re all set.
So what are your favorite deductions? Do you have any tax related questions? Comment below or stay tuned for more tax advice each week on ObsessedAnalytic.com.
Note: As always, check with a tax professional for any serious questions. This is just a guide to get going and shouldn’t be confused with actual legal advice.