When you file your income taxes, you can “write off” certain expenses, and get extra tax credits based on your living situation. This means that if you had a qualifying expense over the course of the year, you basically get to subtract that expense from the income you report to the IRS, which will increase your tax return (or at least lower how much you owe).
Claiming these credits and deductions can be tricky – many people miss out on them simply by not knowing they exist or how to claim them. Only one type of tax credit can be claimed when using the 1040 EZ, so if you think you can claim any others, you will need to use the form 1040 or 1040A (which is the longest, but has the most potential deductions). Actually calculating how much credit or deduction you can get is detailed in the instructions for the 1040.
Deductions VS Credits
There are two ways to reduce your tax bill – a “Deduction” and a “Tax Credit”.
A “Deduction” means you can subtract this amount from your total taxable income, so it will then lower your taxes owed or increase your refund.
A “Tax Credit” is an amount simply subtracted from the amount of tax you are owed. There are also two types of Tax Credits:
- Refundable – if you already owe zero tax, claiming a refundable tax credit means you will get a tax return for that amount
- Non-Refundable – These can reduce your total tax burden to zero, but if it goes lower you won’t get the excess as an extra tax return.
Basically, when you pay an income tax directly from your paycheck, your W-2 form will show how much tax has already been paid. By claiming only “Deductions” and “Non-refundable tax credits”, the most you could get back on your tax return is that full amount.
If you also can claim “Refundable” tax credits, you could end up getting back a return for more than the total taxes you pay.
The Standard Deduction
To make it easier to file taxes, everyone has the option to choose between “Itemized Deductions” or “Standard Deduction”. If you file an “Itemized Deduction”, you need to provide evidence of each item you’re deducting (like receipts and proof it is eligible), which can be very time consuming for small deductions.
Alternatively, if you don’t think you have very much to deduct, you can just claim the “Standard Deduction”, which is a flat $6,300 per person. If you take the Standard Deduction, you get it without having to provide any evidence of anything. Young people with lower incomes and no dependents generally find that their Standard Deduction is bigger than their itemized deduction, and is much easier to work with.
If you do take the standardized deduction, you can still claim other tax credits, but no other deductions. See the IRS page on the Standard Deduction.
Dependents and Children
The most common tax deductions and credits involve families with dependents or children. In order to qualify as your dependent, a person must:
- Be under 18 (17 or 19, for some tax breaks) years old
- Be related to you
- Have lived with you for more than half of the last year
- Not be claimed by someone else as their dependent
If you are able to claim dependents, you cannot use the form 1040 EZ. Click here to see the IRS page on Dependents.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a national program to help raise low and middle income workers out of poverty, specifically targeting families. It is a refundable tax credit.
While you do not necessarily need to have dependents to claim the EITC, you will get a lot more out of it if you do. If you are claiming it without dependents, you can use the 1040 EZ to claim your EITC.
The EITC works by helping people with low income – this means you need to have worked and earned some income for the previous year. The EITC you might be eligible for is shaped like an n – you get very little if you earned very little, then rises with your income to a certain point before tapering off as your income continues to rise.
This is because the EITC is designed to encourage people to be working and earning a wage. For people with very little income from working, the EITC gives very little because it works under the assumption that they are earning other benefits, such as food stamps and housing assistance. It rises in the middle to help the working poor escape poverty, while tapering off as income continues to rise in order to reduce the benefits received by people who no longer require the assistance.
Your EITC goes up significantly if you claim dependents – in 2016 the most you could get with no children was just over $500, while having two children increased the amount to over $5,500.
Click Here to see the IRS page for the Earned Income Tax Credit.
Child Tax Credits
There are also tax credits available specifically for children, creatively named the “Federal Child Tax Credit” and the “Additional Child Tax Credit”.
Federal Child Tax Credit
The Federal Child Tax Credit gives a simple tax credit for $1000 per child, up to a certain income threshold (between $55,000 and $110,000, depending on your marital status). If you earn more than this threshold, you will have $50 less tax credit for every $1000 over the threshold (so a married couple earning $120,000 would have a $950 tax credit). This tax credit is non-refundable. Click Here to see the IRS FAQ for the Federal Child Tax Credit.
Additional Child Tax Credit
This tax credit basically works off of the Federal Child Tax credit – it takes whatever part you could not refund, and makes up to $3000 of it refundable (again, with an income threshold). The rules for this tax credit get more complicated if you have 3 or more children, but the effect is basically making the non-refundable part of the Federal Child Tax Credit refundable. Click Here for the IRS FAQ for the Additional Child Tax Credit.
The Child Dependent Care Tax Credit
This tax credit was created to offset the cost of daycare and child care – you can deduct between 20% and 30% of any child care expenses under $6000 per child (no tax breaks on costs over $6000). Unlike the other tax credits, this one only applies to children 13 or younger. Click Here for the IRS FAQ for the Child Dependent Care Tax Credit.
There are also many deductions and credits available to offset any work expenses you might pay for yourself.
Job Moving Expense
While you cannot write off any costs incurred in a job search, if you need to move between cities when you get a job, you can usually write off part of the moving expense. This is a deduction, subtracted from your taxable income. Click Here for more information about deducting moving expenses.
If you need to purchase a uniform or other work-related equipment for your job, you can also write off these expenses. This is a big deal if you are a contractor or self-employed: you may even be able to write off some of your rent, utilities, and other expenses if you work from home. Click here to learn more about work expense write-offs.
There are also many tax credits and write-offs if you own your home.
If you have a mortgage, some or all of your interest will be tax-deductible. Not all mortgage interest is tax-deductible – you need to provide evidence that your mortgage was taken out to buy your primary residence, or used for extensive renovations, and only applies to interest paid on loans up to $1 million. If your mortgage does not qualify, you can still write off the interest on the first $100,000 of your loan. Click Here for more information about mortgage interest tax credits.
There are also many tax credits available to help offset the cost of renovations you do to your house, if those renovations help it become more energy efficient. These credits were put in place to help homeowners upgrade old insulation and windows, reducing the total energy cost of keeping the house warmed in the winter and cooled in the summer. The tax credit is typically for around 10% of the purchase cost, but this can vary year to year. Click Here for more information about energy efficiency tax credits.
Bigger energy credits are available if you add green energy equipment to your house, like solar panels or residential wind turbines. These credits are typically for about 30% of the purchase cost.
There are several major tax credits if you attend college, or get extra work training. These are in place to encourage people to keep building more valuable work skills.
Student Loan Interest
You can write off up to $2500 of interest on your student loans per year. This works as a deduction, so this amount is simply subtracted from your taxable income. Note that if your parents help with your student loan payments, you can still claim what they pay on your taxes. Click Here for more information about the Student Loan Interest deduction.
American Opportunity Tax Credit
The American Opportunity Tax Credit gives credit for the first $2500 in education expenses per year, but you need to be enrolled in an accredited university in the United States, and be pursuing a degree. You can only claim this credit for 4 total years, and you must be enrolled for at least one full session in the year you claim it.
This is a semi-refundable tax credit – if your tax burden is already zero, 40% (or up to $1000) is refundable. Click Here for the IRS page on the American Opportunity Tax Credit.
Lifetime Learning Tax Credit
The Lifetime Learning Tax Credit is very similar to the American Opportunity credit, but with a lower threshold – only up to $2000, and is not refundable.
The upside is that you can claim it as many times as you like, and do not need to be enrolled in a degree program (so it also applies to extra courses and skill-building programs). Both the Lifetime Learning and American Opportunity tax credits have income thresholds – as your income goes up, your tax credit will be reduced. Click Here to learn more about the Lifetime Learning Tax Credit.
Insurance and Investments
There are also many breaks you can get for some insurance and investment costs, designed to help offset these costs for lower income workers.
Advanced Premium Tax Credit
If you purchased health insurance through the healthcare.gov exchange, you can claim some of your premiums as a tax credit. The actual amount you can claim will vary greatly based on your income and premiums, but the credit is also refundable. Click Here for the IRS FAQ for the Advanced Premium Tax Credit.
The “Saver’s Credit” is another word for the Retirement Savings Contribution Credit – the purpose of this credit is to encourage saving in retirement accounts and IRAs. This credit is for up to $2000, and is calculated as a percentage of your contributions (either 50%, 20%, or 10%, depending on your income). Click Here for the IRS information on the Saver’s Credit.
“Capital Losses” is when you have an investment, whether it is stocks, property, or any other asset, and sell it for less than you paid for it. If your stock portfolio has been taking a beating over the last year, you can write off up to $3000 of losses as a deduction. Click Here for more information about capital loss tax credits.