Paying taxes can put a great burden on your family’s finances plus this is in addition to other major expenses like your children’s education and health costs. However, there are a lot of tax breaks and credits provided by the federal government, you can ease your tax burden significantly and save a substantial amount of money if you use them correctly. The key, of course, is that you are able to identify the legal tax exemptions and deductions that you qualify for, which will ultimately save you a considerable amount of money. With that in mind, here are some tax tips you can use:
Take Advantage of the Dependent Tax Exemption
In general, the first exemption that you see on your tax form is for your children as your dependents. You almost can’t miss this one. You get a tax deduction of $3,500 for every child you have. However, if you are separated or divorced, it is important to note that, in most cases, only the parent who has custody of children qualifies for this tax exemption. Nevertheless, even if your children live with your former spouse, you may still qualify for the dependency tax exemption if your former spouse makes a written declaration allowing you to take the exemption on his or her behalf. As we said in Budgeting for a Baby the average kid will cost you $235,000 to raise until age 18 (and that’s not counting college) but at least over those 18 years they will save you $63,000 in taxes.
Deduct Medical Expenses
If you incur any medical expenses that are over 7.5% of your total gross income, you can deduct them from your total taxable income. If you have a family, it is quite easy to qualify for this exemption since you can subtract all of your children’s medical bills including out-of-pocket payments for medical checkups, prescriptions, health insurance premiums, and even money spent on prenatal expenses such as birth classes. This means that if you earn $50,000/yr you can’t deduct the first $3,750 but you can deduct anything over that amount. This includes un-reimbursed doctor bills, co-pays, dentist bills, vitamins, aspirins, nasal spray, glasses, etc.
If you file jointly, all health care bills above 7.5% of your combined adjusted gross income in the year you file your tax returns are deductible, even if you or your dependents received medical attention in a different year. This can be useful if you don’t quite meet the 7.5% threshold. By either prepaying medical bills or postponing them until the next year you can clump your bills together so that at least you will qualify in alternate years.
Take Advantage of Child Care Credit
If you are the custodial parent of a child aged 12 years and below, you qualify for a tax credit of up to 35% of the child’s daycare expenses. However, you must be able to prove that you provide a home for the child and finance over half of the costs of caring for the child. Moreover, if you incur childcare expenses for a child who is over 13 years old and has physical or mental difficulties, you also qualify for this tax credit. Once you determine that you qualify for this credit, ensure you ask your childcare provider to give you their tax identification number which you should include in your tax forms.
Tax Exemptions for Higher Education Costs
If you are currently pursuing higher education (i.e. college) or are paying for your children’s higher education expenses, you qualify for this great tax break. The American Opportunity Tax Credit enables parents to take some tax savings on the out-of-pocket expenses that they pay for their own or their children’s college education.
Tax Deductions (Exemptions) vs. Tax Credits
If given a choice between a tax exemption or a tax credit always look for credits first. A credit goes straight toward paying your tax and can result in a refund even if you didn’t pay any tax. Â Deductions reduce your income. So if you are in the 20% tax bracket a $100 deduction will save you $20 in taxes while a $100 credit will save you $100 in taxes. One good way to ensure that you are getting all the credits and deductions you are entitled to is to use a good tax software program. They generally have a built-in questionnaire that will help you discover any deductions you might be missing.
Recommended by Amazon:
- Â TurboTax Deluxe Federal + E-File + StateÂ
- J.K. Lasser’s Your Income TaxÂ
- J.K. Lasser’s 1001 Deductions and Tax BreaksÂ
- Adams Tax Preparation Organizer
- Deduct It! Lower Your Small Business Taxes
See Also:
- Putting a Lid on Health Care Costs
- 5 Tips to Avoid Bankruptcy
- Relevant Life Insurance Tax Benefits
- Avoid the Hassle of an IRS Audit
- Best States for Relocation with Regards to Income Tax
Image courtesy of Stuart Miles / FreeDigitalPhotos.net