Time to file your tax returns? Make it a happy exercise by using tax benefits to bring down the taxable amount. You can use deductions, exemptions, and tax credits to legally reduce your income tax liability. Reduce your tax liability Your task of filing taxes becomes easier if you keep a record of all your income and expenditures. If you do not have these details in place, sort through the mess and pick out all the relevant records. Do some research online to find out which tax benefits, deductions, and exemptions you are eligible for. Deductions and exemptions reduce the amount of your taxable income. Credits are the dollar amounts that can be subtracted from your computed income tax bill. Deductions Deductions are the most common type of tax benefit you can claim. Everyone can claim tax deductions which can either be standard deductions or itemized deductions, but not both. The standard deduction has been increased for the year 2018. It is now $12,000 for single filers or for those who are married and filing separately. For married couples filing jointly, the standard deduction is $24,000. For someone filing their tax return as head of household, the standard deduction is $18,0000. For most people, with this increase, the standard deduction could provide more savings than itemized deductions. Many deductions have been eliminated by the Tax Cuts and Jobs Act of 2017. At the same time, if you have made charitable contributions to tax-exempt organizations, if you are paying interest on a home mortgage, or if you are paying for work-related education, itemized deductions will be better. Other deductions you can itemize include state and local income taxes, and medical and dental expenses that are above 7.5% of your adjusted gross income. Exemptions Like deductions, exemptions help reduce your taxable income. Personal exemptions were available till 2017, but they have now been eliminated. However, you can still claim dependent exemptions. Generally, these are for minor children or those who are studying in college full-time. You can also claim other relatives as dependents if they have lived with you as a member of your household for at least half a year. Credits Tax credits are applied after your income tax is calculated. This is after applying all the deductions and exemptions you qualify for. Tax credits can be specific amounts or percentages of certain expenses. They provide a dollar-for-dollar reduction of your tax bill. You can claim tax credits for a child or dependent care if you are in the low- or middle-income group. With the Child Tax Credit, you can claim $2,000 for each child if you qualify. The Child and Dependent Care Credit covers a percentage of daycare or similar expenses (up to $3,000) for a child or an invalid dependent. Adoption Credit lets you claim up to $13,800 in adoption costs. You also get credits for contributing to retirement funds and education expenses of your children. All of these are based on income, and if you are in the high-income brackets, you will not qualify for them. If you belong to the higher earning brackets, you get rewarded for eco-friendly investments or purchases. If you install solar energy systems in your premises or buy a plug-in electric car, you get tax credits. You can reduce your income tax in many ways. Start doing some research on the deductions you qualify for and the tax credits you can apply for. Make use of the dependents exemption to reduce the amount of taxes you owe.
