We are heading into the 1st quarter of the year. There’s less than three months left to make an impact on your 2017 taxes. Understanding tax deductions vs. tax credit and how it’s enveloped into your personal finance is essential. I am sure you will agree with me that it’s better to not owe taxes than to owe taxes. Many times, young adults don’t understand they may be eligible for tax deductions or a tax credit. Most young adults don’t know the difference between a tax deduction and a tax credit. I wrote in a previous blog the difference between the two terms. Here’s my explanation of tax deduction and tax credit: “A tax deduction is an amount of money or expense taken “off the top” from your gross income. Examples of a deduction would be your traditional IRA contributions, 401(k) or 403(b) contributions, student loan interest, etc. After all the deductions are subtracted from your gross income, you are left with your adjusted gross income (AGI). Subtracted from your AGI is your standard deduction or itemized deduction. After “all is said-n-done” you are left with your taxable income. This amount determines how much tax you will owe known as tax liability, or as prefer to call it your tax bill. A tax credit is a dollar-for-dollar reduction. This amount is not taken “off the top” from your gross income, but, rather is subtracted from your tax bill. For example, your tax bill is $1500 and your tax credit is $1000. Your tax bill is reduced to $500 ($1500-$1000).”
Moreover, it’s essential you keep a folder of any documents relevant to your finances; such as your education expenses, moving expenses, mortgage interest, investment statements, etc. By the end of January 2018, you should have received your W-2s, 1099s, etc in the mail from the IRS. Furthermore, make sure you visit the IRS website: http://www.irs.gov/publications/p552/ar02.html#en_US_publink10008588. This website provides more information on what records to keep, why you should keep records, and how long to keep records.
There are many ways a person can become eligible for a tax deduction or tax credit. Depending on your finances, handling your own taxes can be a simple process or complex. Speak to your CPA/tax advisor in order to get direct advice for your financial situation. Therefore, I am going to shear the various methodology to 4 tax tips that may help you minimize your taxes:
Is your closet full of clothes you no longer wear anymore? My mother is an advocate of donating any little bit of clothing, shoes, furniture, etc that was no longer was utilized. Ever heard the phrase “one man’s trash is another man’s treasure?” Recently, I donated two chests to the Furniture Bank and I was given a receipt for my donation. If you are donating cash, make sure you keep records of that as well. Again, have records acknowledging your donation.
2. Contribute to your retirement plans:
As you may already know, you contributions to your Traditional IRA (max contribution is $5,000) and defined contributions plans, such as a 401(k), 403(b), and/or 457 plans (max contribution is $16,500) is a tax deduction. Your contributions to these plans are pre-tax which means you are contributing a portion of your gross salary. Contributing $50 every paycheck doesn’t mean a $50 reduction from your net pay. It means $50 from your gross salary.
3. Moving Expenses:
If you had to move because of a job, you can deduct the cost of moving as long as the job was at least 50 miles from where you lived.
4. Hope Credit and Student Loan Interest:
For the Hope Credit, you may be eligible to claim up to $1,800. Keep in mind you will apply the Hope Credit to your tax liability. For the student loan interest, you may be eligible to deduct from your income up to $2,500.
My move from California to Georgia in 2018 is a classic example I have used before. I kept all my moving expenses in a separate folder. When tax filing for 2018 came around, I used H&R Block to file my taxes myself, which was so easy. I deducted my moving expenses, and it really helped!