Tax Credits and Deductions: Do They Apply to You?

💵 Tax credits and deductions

Personal taxes are broken into two basic parts - your income and any deductions or credits. Once you’ve figured out your income sources, there are opportunities to adjust your taxes with credits and deductions.  Tax credits directly reduce the amount of tax you owe, giving you a dollar-for-dollar reduction of the taxes you owe. That means $100 in credits means $100 less in taxes you owe.

Tax deductions, however, reduce how much of your income is subject to taxes. That means that if you are in the 24% tax bracket, a $100 in deductions reduces the taxes by $24.

Many of the deductions and credits will depend on your filing status, income and if you are using the standard or itemized deduction options.

Like with income, making sure you have the right information is important. Here are some key forms and information you will want to keep in your records.

🧑‍🧑‍🧒 Credits for your family

Child and Dependent Care Credits

If you have children or dependent adults; you may be able to credit a portion of the money you spend on their care. It is important to keep good records of these expenses, including day care, nursery school costs, salaries paid to a household employee (such as a nanny), and payments to babysitters, maids, or cooks if the payments are made for your child or dependent's wellbeing.

Adoption Credits

If you adopted a child, even if you started the process and were unsuccessful, you may be able to take the adoption credit for the expenses you incurred. These expenses can include travel (including meals and lodging), court costs, attorney fees, and other expenses related to the adoption process.

🧑‍🏫 Credits and deductions for education

Expenses for higher education like tuition and books add up, but you may also receive credits for the money you spent. You can get a Form 1098-T from the educational institution that shows the expenses you paid along with your scholarships and grants.

If you are repaying student loans, you will receive a 1098-E form that reports interest you paid. You may be able to deduct up to $2,500 of interest if you qualify.

🏡 Credits and deductions for the home

You may be able to claim a deduction for costs related to your home mortgage including loan interest, points, and refinancing costs. This information would be listed on Form 1098. You can also get a deduction for the property taxes you pay your state and local governments. Many times, this information is listed in your mortgage or escrow statement.

There are also credits available for mortgage interest that helps lower-income individuals purchase and own their own home, as well as credits to make your home more energy efficient or install clean energy systems.

💙 Credits and deductions for taxes and charitable donations

Some taxes and fees paid to state and local governments, as well as foreign taxes can be used as deductions and credits.

Charitable contributions of cash or donations can also be deducted from your returns but if you are using a standard deduction, they might not qualify. You may be required to show verification of donations so hold on to any donation receipts from verified 501c3 non-profits.

✅ Final tips

The Internal Revenue Code is over 70,000 pages and this article only covers a few of the items to keep track of. As you go to finalize your tax preparations, here are a few suggestions.

❌ Things to avoid:

• Forgetting to report all your income
  Make sure to include all of your income including all W-2s and 1099 forms, even the small stuff. Unreported or incorrect information can trigger audits.

• Missing deadlines
  You need to file by April 15 or ask for an extension. You can request a payment schedule if you can’t make your full payment on the tax deadline. Late filings can result in penalties.

• Misunderstanding deductions and reporting
  Taxes can sometimes get fairly complicated. If you don’t understand the rules and further research is inconclusive, it is best to consult a qualified tax professional.

✏️ Tips for managing your tax forms:

• Dedicated space
  Create a folder, either physical or digital, to gather information as it arrives until you are ready to prepare your taxes. This will prevent scrambling for documents and information when you sit down to file.

• Check your information
  Make sure information like names, social security number, and income are reported correctly.If you find mistakes on your W-2 or 1022 forms, ask for a corrected version from the issuer.

• Follow up on any missing forms
  Download electronic copies when available and contact employers and other organizations if forms haven’t been received by mid-February. Don't assume they are in the mail, reach out!

• Keep copies
  Maintain records for at least three years. Store records in a safe place, like a fireproof safe for physical copies or encrypted digital files. Fruition members have access to the My Files feature on their accounts where documents can be uploaded and stored securely.

💪 You've got this!

Understanding tax forms doesn’t have to be overly complicated.  Knowing what forms to look for and when to expect them, can give you a leg up to start your tax season off right.

The IRS automatically screens incoming tax returns and notes if a return doesn't match up with any W-2 forms and 1099s they receive for employers and issuers. That's why double and triple checking your information is so important. With these tips and some patience, you can be well on your way to an easy tax season.

This guide is for informational purposes only. Tax rules are complicated and change regularly. Consult a qualified tax or financial adviser for your personal situation.