Though it sounds strange to say, tax season is upon us. Even though its shorts and sandals weather, a delayed tax filing date of July 15 is one of the silver linings of the coronavirus. While there have been changes in recent years to the types of deductions many of us can take — as well as an increase in the standard deduction which makes itemizing more challenging — this year's unusual circumstances put extra emphasis on maximizing every deduction you can take.
Let's get started with the most common categories:
Education-related deductions
Both the Lifetime Learning Credit and American Opportunity Tax Credit (AOTC) are wonderful tax incentives for lower and middle-income filers who choose to pay for higher education. The Lifetime Learning Credit is available for individuals enrolled in undergraduate, graduate, or professional programs, including courses to improve job skills, and is worth up to a maximum of a $2,000 tax credit (or 20% of your first $10,000 in educational costs). The LLC isn't available to single filers earning in excess of $68,000, or joint filers earning in excess of $136,000. The LLC is an excellent deduction for many middle-class adults who are seeking job retraining or to further their education.
The AOTC, on the other hand, is designed for first-time undergraduate students, and is worth $2,500 yearly per eligible student. Furthermore, if this results in zero taxes owed, you can even have up to a $1,000 credit refunded. To claim the credit, you must have not completed more than four years of higher education, and be enrolled at least half-time for one semester (or trimester) during the year you're claiming.
When comparing the two tax credits, keep in mind that you can only claim one — no double-dipping is allowed, so choose wisely.
The Student Loan Interest Deduction allows you to deduct the lesser of $2,500 or the amount you paid in qualifying student loan interest. The deduction starts phasing out for single earners with a Modified Adjusted Gross Income above $65,000, and is unavailable above a MAGI of $80,000. For joint filers, that deduction starts phasing out at $135,000 and is unavailable above $165,000.
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Family and care-related deductions
The Child and Dependent Care Tax Credit allows you to claim a credit of up to $3,000 for each qualifying individual, and $6,000 for two or more qualifying dependents, such as a disabled spouse, or parent for whom you provide caretaking. It's an especially valuable credit for so-called "sandwich generation" people who are caring for both kids and aging parents.
The Child Tax Credit is similar, but applies to a variety of children aged 17 or under who are dependents, including nieces or nephews, grandchildren, step-children, foster kids, or younger siblings. It's worth $2,000 per each qualifying child who is listed as a dependent on your tax return.
The Adoption Tax Credit is permitted for qualifying expenses leading to the adoption of an eligible child. It is fully available to those with a MAGI below $211,160, and phases out above that up to a maximum income of $251,160.
Other common tax credits & deductions
The Earned Income Tax Credit is an excellent tool for many low-to-moderate income earners, especially those with children, as it can provide a tax credit of up to $6,557 if you have three or more qualifying children. To qualify for the deduction, you must meet certain income limits, and have investment income of under $3,600 for the year.
Medical and health expenses can be tax-deductible if you intend on itemizing deductions (rather than taking the standard deduction), and if the costs exceed 7.5% of your Adjusted Gross Income. This deduction category is broad, and encompasses a great variety of treatments, providers, medications, and assistive devices. It can even include reasonable transportation costs to health-related visits or appointments. Similarly, contributions to Health Savings Accounts are also tax deductible.
And don't forget that if you itemize deductions, you may generally deduct up to 50% of your income used for charitable donations, with certain exclusions and limits.
Finally, although this year has been financially taxing for many of us, it's not an excuse to miss the July 15 filing deadline. Request an extension, if necessary.Â
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