How much money will you be paying in taxes this year?
Hopefully, the lowest amount legally possible!
To help you do just that, we’ll be going over the 12 most overlooked tax breaks you can take today.
The more tax deductions and credits you get, the more money you get to keep.
So, hold off on filing your taxes until you’ve gone over this entire list because there are money-saving tax breaks here for everyone.
Note that this post is for educational purposes and you should contact your attorney or legal professional for specific advice for your situation.
Let’s dive in!
12 Best Tax Breaks To Help You Save Money
1. 0% Tax on Capital Gains
The 0% tax rate has been in effect since 2008 and allows you to realize the gains from your investments – completely tax-free.
So, who is applicable for the 0% tax rate?
To find out, simply look at the long-term capital gains tax chart.
If filing taxes for 2020, married couples filing jointly who make up to $80,000 in taxable income or single filers who make up to 40,000 in taxable income.
For 2021, the income limits rise to $80,800 for married couples filing jointly and $40,400 for single filers.
Note that this only applies to long-term capital gains which are gains from an investment held longer than a year.
Short-term capital gains are taxed as ordinary income based on your federal income tax bracket.
2. Child Care Credit
If you have a child under the age of 13, you may be able to get up to a 35% credit for all or some of your cost for child care.
The credit is known as the Child and Dependent Care tax credit and the limit is $3,000 for one qualifying child or $6,000 for two or more.
The actual % of your credit depends on your income but the credit does not phase out completely for higher earners.
To be eligible, the cost for childcare must be so that you (and your spouse if married filing jointly) could work, seek employment, or attend school.
Pro tip: Household expenses such as paying a cook or cleaner count as qualifying expenses.
Also, this credit is not only for children but includes any care for a dependent including your spouse, 13 or over, who is physically or mentally incapable of caring for themselves.
Now, let’s go over a few tax breaks for the homeowners out there.
3. Mortgage Points Deduction
Mortgage points, also known as loan discounts or loan origination fees, are mortgage interest you pay upfront when you take out a mortgage.
If you paid points on your mortgage, there’s a good chance they are fully deductible in the year they were paid, if the mortgage is for your main home.
In general, if you paid points to refinance or paid points for a secondary home, you will have to deduct the mortgage points over the life of the loan.
This means on a 30-year mortgage, you would deduct 1/30th of the points paid each year.
Pro Tip: If you pay off the loan early, you can deduct the remaining mortgage points in the year you pay off the mortgage.
That is unless you refinance with the same lender. If you do, you will need to deduct all remaining points over the life of your new loan.
4. Mortgage Insurance Premium Deduction
If you get a conventional loan and put less than 20% down or refinance with less than 20% in equity, your lender typically requires you to pay monthly Private Mortgage Insurance (also known as PMI) with your mortgage.
While the extra cost may sting, if you itemize during tax time, being able to deduct your PMI may make you feel a bit better.
The deduction starts to phase out after $100,000 in adjusted gross income and disappears completely after $109,000 in adjusted gross income.
That’s $50,000 and $54,500, respectively, if filing married but separate.
Pro Tip: This deduction is scheduled to end after the 2020 tax year but may be extended as it has in the past.
5. Mortgage Interest Deduction
The mortgage interest deduction allows you to deduct the amount of interest paid on your home loan during the year.
If you purchased your home before December 16, 2017, you can deduct the mortgage interest paid up to the first $1 million in mortgage debt.
If you purchased your home after December 16, 2017, you can deduct the interest up to the first $750,000.
In most cases, those in higher tax brackets will see the biggest benefit as they will receive a larger tax break.
6: Residential energy credit
If you installed appliances or made improvements to your home to boost energy efficiency, you may be able to get a credit for the associated cost.
Solar, wind, geothermal and fuel-cell technology are eligible for the Residential Renewable Energy tax credit.
This includes items such as energy-efficient windows, doors, and solar-powered water heaters and roofs.
The tax credit you can receive is a percentage based on the cost of equipment, including installation costs.
Here’s how the tax credit works:
- 30% credit for systems placed in service by December 31, 2019
- 26% credit for systems placed in service after December 31, 2019, and before January 1, 2021
- 22% credit for systems placed in service after December 31, 2020, and before January 1, 2022
Note that currently, the residential energy credit expires at the end of 2021.
Pro Tip: Both existing homes and new construction qualify. Rentals do not qualify for the residential energy credit.
If you own a business, the next few tax breaks are for you.
7. IRS Minimal Rent Use Rule
If you didn’t know, the IRS allows you to rent out your home to your business for up to 14 days per year completely tax-free.
When doing so, be sure the rental rate your offer your business is actually reasonable.
A good rule of thumb would be to call local hotels or event spaces and inquire about the rates.
You will want to keep documentation of both your rental rate and meeting minutes as evidence.
Pro Tip: Anything over 14 days, will require you to report all rental income so be sure you don’t go over.
8. Home Office Deduction
Business owners who work from home have the chance to save big on taxes by taking the home office deduction.
If you use a portion of your…
- mobile home,
- boat, or
- similar structure
…regularly and exclusively for business, you can write off any associated rent, utilities, real estate taxes, repairs, and maintenance amongst other things.
Unfortunately, employees who work from home are not able to take advantage of this deduction.
9. Student Loan Interest Deduction
If you are a college student or parent of a college student who took out a loan to pay for school, you may deduct up to $2,500 in paid interest.
The loan itself had to be used for qualified expenses, such as tuition and textbooks, and not for expenses such as room, board, and transportation.
At this time, interest on federal student loans has been suspended since March 13, 2020.
If you paid any interest before that date in 2020 or have private loans, you are still eligible for the deduction.
10. Lifetime Learning Credit
Another rare tax break available for students is the Lifetime Learning credit.
The Lifetime Learning credit allows college students and parents of college students to get up to a $2,000 credit to offset tuition and education-related expenses.
To qualify, your tuition and fee payments must have been made to a post-secondary school during the year.
You are still eligible for the credit for any post-secondary classes you enrolled in even if it is not towards a degree.
If your adjusted gross income is over $68,000, or $136,000 for joint filers, you will not be eligible to claim the credit.
11. Charitable Deduction for Non-Itemizers
Non-itemizers rejoice! Previously, charitable donations could only be deducted if you itemize during tax time.
For the 2021 tax year, if you take the standard deduction, you can deduct up to $300 of cash donations you made to a qualified charity, or $600 if filing jointly.
Be aware that donations of household items or cars do not qualify for this special deduction – this is a cash-only deduction.
If you choose to itemize, you can still deduct charitable donations as normal.
12. Medical Expenses Deduction
Did you know that you can deduct qualified, unreimbursed medical expenses?
To do so, the medical expense has to be more than 7.5% of your adjusted gross income.
For example, let’s say your adjusted gross income is $50,000, you could deduct everything after 7.5% of your AGI or $3,750 of medical bills.
This means $10,000 in medical bills would allow you to deduct $6,250 of the cost.
The IRS has an extremely long list of the medical expenses that qualify but a few examples include payments to an ambulance, crunches, and eyeglasses.
Note that the deduction is for unreimbursed medical expenses so if your insurance company paid for it, you are not allowed to deduct it.
There you have it – 12 tax breaks most people miss that can help you save BIG during tax time!
We hope you found this post useful and interesting.
If you need help with your tax preparation, tax planning, or want to talk to a tax professional, we’re just a call away! Get in touch with us at 470-240-1437.