Tax Deductions 2020: What Are They and What Can You Claim?
The US tax code has experienced some big changes in recent years and many of those have impacted tax deductions. As things stand, there are several different types of tax deduction and this complicates things somewhat if you’re not experienced in this area and/or you’re filing for the first time.
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To help you out, we’ve provided a rundown of everything you need to know about standard deductions and itemized deductions for the upcoming tax year.
What are Tax Deductions?
Tax deductions come in several forms. The main purpose of all these, however, is to reduce your taxable income. If you claim a tax deduction of $1,000, for instance, your taxable income will reduce by $1,000 as well, which means you will pay less tax.
Most deductions are either itemized or standard, as discussed below.
What are Standard Deductions?
Every household is entitled to make standard deductions if they choose to.
A standard deduction is the amount of your earnings not subjected to tax. It can be taken by anyone who doesn’t itemize their deductions, with the exact amount dictated by age and filing status, as below.
Standard Deductions for 2020
- Single Taxpayers = $12,400
- Married Taxpayers (separate filing) = $12,400
- Head of Household = $18,650
- Married Taxpayers (joint filing) = $24,800
- Qualifying Widows = $24,800
What are Itemized Deductions?
With itemized deductions, you deduct every single expense accrued throughout the tax year.
This will only be worth your while if your tax deductions are greater than the amounts allowed by the standard deduction limits outlined above. This simply won’t be worth it for the majority of households, especially when you consider the huge increase in standard deductions made during the last few years.
For those that can benefit, all the following tax deductions are available:
1. Charitable Donations
Taxpayers can deduct all donations made to charities, covering as much as 60% of their adjusted gross income (AGI). However, it’s worth noting that making a donation to a college in order to purchase game tickets is no longer considered a deductible donation and there are other rules regarding charitable contributions as well.
2. Mortgage Interest Payments
Interest payments can be deducted on first and second homes. Homeowners can include interest payments made on debts of up to $750,000. This also applies to home equity loans, providing those loans are used to improve the home.
3. Property Tax, Sales Tax, and Income Tax
Taxpayers can claim state taxes or income taxes as a deduction. They can also claim property taxes. These deductions are known as SALT, which stands for State and Local Taxes.
4. Medical Expenses
Taxpayers can deduct medical expenses up to 7.5% of their adjusted gross income. Medical debt is one of the biggest issues facing the US today and many households have bills to pay.
Other Popular Tax Deductions
Once you get the basics out of the way, there are countless other tax deductions. We have outlined some of the most popular below:
- Student Loan Interest: Student loans are crippling, with millions of Americans struggling to repay billions in debts. The good news is that up to $2,500 of those interest payments can be deducted every year.
- Child Tax Credit: Up to $2,000 deducted per child, with $500 for dependents that are not children.
- Adoption Credit: Over $14,000 can be deducted in adoption fees for every child. Adoptions can be expensive, but these deductions help.
- Self-Employment Expenses: Self-employed individuals, including freelancers and contractors, can make a number of tax deductibles. Anything that relates to your business and your activities as a self-employed individual can be deducted.
- American Opportunity Tax Credit: Claim every cent of the first $2,000 that you spend on tuition and educational materials, but not living expenses.
- Educator Expenses: If you work in the education process, you can deduct up to $250 of the money that you spend on essential classroom supplies—anything you need to teach. This applies to all schoolteachers, as well as other eligible educators.
- Earned Income Tax Credit: You can deduct over $6,000 depending on how many dependents you have, how high your income is, and what your marital status is.
- Lifetime Learning Credit: Claim a maximum of $2,000, covering expenses needed for coursework, including educational materials.
- Gambling Losses: You can’t deduct gambling losses outright, but you will need to report your winnings and it’s from those winnings that you can deduct your losses. For instance, if you win $1,000 playing the lottery and spend $100 on tickets, you can deduct that $100.
- IRA Contributions: You can deduct some of the contributions that you make to a traditional IRA. How much you can deduct, however, will depend on whether you are covered by a retirement plan at work.
- Home Office Deduction: If you have an office in your home that you use for business-related purposes, you can deduct expenses relating to ongoing maintenance and repairs, including rent, utilities, repairs, and more.
- Energy Credits: Claim close to a third of the costs of installing solar panels in your residential property. Save money on bills, do your bit for the environment, future proof your home, and get a few bucks off your taxes in the process.
Bottom Line: Get Help Filing Taxes
Taxes are one of those things that seem incredibly difficult at first but get very easy with time. If you take the time to research the process and get it right, it’ll be a breeze the next time you file.
Alternatively, you can hire a tax professional, assuming you have the budget to cover it, or use tax preparation software. The latter is a much cheaper option and can keep track of tax deductibles, while helping you to file your state tax return and federal tax return every year.
Tax software can also help with capital gains, tax refunds, business expenses, and more. It’s a relatively pain-free way of dealing with the Internal revenue service, which is worth its weight in gold.