Tax Breaks for Your Personal Tax Return

Tax breaks can help you reduce your taxable income or lower your tax bill, giving you significant savings. In this post, we’ll explore common tax breaks, including education, retirement, and itemized deductions, so you can make informed decisions. With proper planning and knowledge, you can take full advantage of these opportunities to save money.

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December 26, 2024

Two Main Types of Tax Breaks

Deductions and credits are the main types of tax breaks. While deductions reduce your taxable income, credits reduce your tax liability dollar for dollar. Therefore, it’s important to understand both options to maximize your savings.

Education Tax Breaks

Student loan Interest Tax Deduction

If you paid interest on student loans, you can deduct up to $2,500. However, this deduction may phase out depending on your modified adjusted gross income (MAGI). As a result, it’s crucial to check the eligibility limits before claiming this break.

American Opportunity Tax Credit

The American Opportunity Tax Credit (AOC) allows you to claim 100% of the first $2,000 spent on tuition, books, supplies, and school fees—excluding living expenses or transportation. Additionally, you can claim 25% of the next $2,000, bringing the maximum credit to $2,500. Since the credit is partially refundable, you may receive up to $1,000 as a refund if it reduces your tax bill to zero.

Lifetime Learning Tax Credit

The Lifetime Learning Credit allows you to claim 20% of the first $10,000 spent on tuition and qualifying fees, with a maximum credit of $2,000. While living expenses and transportation are not eligible, you can include books or supplies required for your coursework.

Educator Expenses

Eligible educators can deduct up to $300 annually for classroom expenses unreimbursed by their employer, such as books, supplies, and software. Additionally, married educators filing jointly can deduct up to $600.

Retirement Tax Breaks

traditional Ira Contributions

Contributions to a Traditional IRA are deductible up to $7,000 ($8,000 if you’re 50 or older) for 2024. If you or your spouse have a workplace retirement plan, the deduction may be limited. As a result, it’s important to understand your eligibility before making contributions.

SEP and Simple IRA Contributions

Self-employed individuals can benefit from SEP or SIMPLE IRA plans. Contributions to a SEP are limited to 25% of compensation or $69,000 in 2024. Additionally, SIMPLE IRA contributions allow employees to save up to $16,000 ($19,500 if 50 or older). These options provide a flexible way to save for retirement while reducing taxable income.

Other Tax Breaks

Health Savings Account (HSA) Contributions

If you contribute to an HSA with after-tax funds, those contributions are deductible. For 2024, the contribution limits are $4,150 for individuals and $8,300 for families. Those 55 or older can contribute an additional $1,000. This deduction can be especially valuable if you have high-deductible health plans.

Electric Vehicle Tax Credit

The EV tax credit offers between $3,750 and $7,500 for new vehicles and up to $4,000 for qualifying used cars. In addition, eligibility depends on factors like income, vehicle price, and compliance with IRS manufacturing standards for qualified EVs.

Child Tax Credit

The child tax credit is $2,000 per qualifying child under age 17. Also, it is partially refundable up to $1,700 for 2024, up from $1,600 in 2023. Note that the credit phases out for joint filers with a modified adjusted gross income (MAGI) of $400,000 and $200,000 for single filers.

Itemized Tax Deductions

The following deductions are deductible only if you do not use the standard deduction.

Charitable contributions

Donations to 501(c)(3) organizations are deductible, typically up to 60% of your AGI. Furthermore, cash contributions over $250 require a written acknowledgment. Non-cash donations worth over $5,000 require an appraisal. Therefore, always keep detailed records of your donations.

However, there is a way to gain tax benefits with charitable donations without itemizing your deductions. You may be able to take advantage of qualified charitable distributions if you are eligible.

Mortgage Interest Tax Deduction

Interest on mortgage loans is deductible for up to $750,000 of debt. For loans before December 16, 2017, the limit is $1 million.

State and local taxes

You can deduct up to $10,000 ($5,000 if married filing separately) in combined state and local taxes, which include:

Income taxes
Sales taxes (choose one)
Real estate taxes
Personal property taxes

Medical and Dental Expenses

Out-of-pocket medical and dental costs exceeding 7.5% of your AGI are deductible. These include surgeries, prescriptions, and even travel expenses for medical care. Therefore, keeping track of these expenses can yield significant tax benefits.

Note that certain medical expenses are not deductible, including over-the-counter medicines, most cosmetic surgery, and nutritional supplements.

Make the Most of Your Tax Breaks

These tax breaks play a crucial role in reducing your tax liability. Keeping thorough records will help you claim every deduction and credit you’re entitled to. As a result, you can maximize your savings.

At DuPage Tax Solutions, we’re here to simplify the process. Our experts provide personalized guidance to ensure you make the most of available deductions. Contact us today to optimize your tax return and save more.

References

Credits & Deductions for Individuals | Internal Revenue Service. https://www.irs.gov/credits-deductions-for-individuals.

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