4. Tax Deductions
Deductions are certain expenses that have limited or no tax collected upon them. For instance, if we purchase medical insurance or have other medical expenses during the year, we may be able to deduct those expenses from our income for tax purposes. However, there are certain limitations put on what and how much we can deduct. Some of the general categories of expenses we can deduct from our income are: interest paid to purchase our homes, medical expenses, taxes paid to other governments like the state, losses from fires and other disasters and contributions to charity.
Owning a home, apartment or condo has become part of the American Dream. Purchasing a house or apartment can be very expensive. Most of us need to borrow money in order to purchase a home. The interest paid on the borrowed money is most likely deductible from your income taxes. So paying a lot in interest may benefit your tax situation, but going deeply into debt just to benefit your tax situation usually isn’t beneficial in the long run.
Medical, dental and vision insurance premiums can be deductible from your income taxes. Long-term care insurance may also be deductible from your income taxes. These are considered some of the deductible medical expenses. Other deductible medical expenses include co-payments and payments to doctor and hospitals. The costs for purchasing eyeglasses are deductible, but the cost of laser correcting eye surgery is not. The difference is that the laser surgery is a choice we make and needing corrective eyeglasses is not. Keeping track of your medical expenses throughout the year in one place is a good way to be prepared come tax time.
Sometimes taxes themselves are deductible. The registration fee for your license plates on your car is a good example of a deductible tax paid. Also, if you pay real estate taxes on your home, those may be deductible.
For the important and expensive things in life, most of us purchase insurance like auto insurance or home owner’s insurance. But having insurance doesn’t always pay the full amount of the loss if we experience an accident or other disaster. For tax purposes that is considered a casualty loss. The amount that you pay not covered by insurance may be eligible for a tax deduction. The government is giving us a break on a bad situation by not taxing us on the cost to fix it.
Many of us choose to donate a portion of what we make or own to charity. When you give a cash donation to a church, synagogue, mosque, or other charity, be sure to get a receipt. Also, if you are spring cleaning and donate old clothes and household items to charity, but sure to get a receipt. To encourage us to donate to others, the government will give us a deduction on what we contribute. We just need to be able to prove it with receipts. This is another good example of how keeping track of certain expenses can benefit us at tax time.
The government encourages you to further your education by making certain tuition and fee costs and student loan interest costs deductible. Many scholarships, fellowships and need-based education grants are tax-free – if you are a candidate for a degree at an eligible education institution and the scholarships or grants were used to pay for your education. Tax incentives are also offered for saving for for education througha vehicle created for that purpose. For example, the CollegeInvest 529 college savings program offers a dollar-for-dollar state income tax deduction for Colorado residents.