At a Glance
You don’t have to be wealthy to take advantage of tax loopholes. There are plenty of deductions out there that the average American can use to lower their tax liability come April. If you owed money to the IRS last month and want to know how to prepare for the next tax season, take a look at these deductions.
Is the average amount paid among the top 50% of taxpayers in 2018.
Tax deductions to look into when filing taxes in 2024
You might not qualify for all of these tax credits and deductions. However, even if you qualify for just one, you’re saving yourself money come tax time. Ideally, you will get a refund when you file next year rather than having to pay hundreds or thousands out of pocket.
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American opportunity tax credit
If you make less than $80,000 as a single person, you can qualify for the American Opportunity Tax Credit, which is an educational credit. It only applies to the first four years of higher education but allows you to claim up to $2,500 per student for educational expenses like tuition and books. If your credit is more than what you owe in taxes, 40% of the overage is refundable.
Retirement savings contribution credit
This credit is specifically designed for low-income people to contribute to retirement plans. If you are married and filing jointly with an adjusted gross income of $78,000 or less for the tax year 2022, you can write off up to $4,000 in contributions to a retirement account, like a 401(k). The total amount of your credit will depend on your income, so be sure to talk to a professional if you are interested in qualifying for this.
Earned income tax credit
The earned income tax credit lowers your total tax liability depending on the number of children you have. For example, if you are single with no children and make less than $16,480, your maximum credit is $560. However, if you’re married and filing jointly with three or more children and make less than $59,187, your maximum credit is $6,935. This credit was designed to lower the tax burden for low-income families.
Mortgage interest deduction
When you own a home, your monthly payment consists of the principal and interest. With the mortgage interest deduction, you can deduct the interest portion of your monthly payment with a qualifying mortgage.
Child tax credit
If you have children that you claim as dependents on your taxes, and they are younger than 16, have a social security number, and live with you for at least half the year, you could be eligible for a tax credit of up to $2,000 per child. The earning threshold is high – $200,000 for single adults and $400,000 for married filing jointly. Even if you don’t owe tax before claiming the refund, you could get up to $1,500 back. You can also get a $500 credit for dependents that might not qualify for the child tax credit.
Max out your 401(k)
Your contributions to an employer-sponsored 401(k) and other individual retirement accounts will lower your total taxable income. Note that this isn’t a tax deduction but is an opportunity to shuffle money around to avoid paying taxes on it. If you take $500 out of your paycheck every month to put towards your 401(k), that means you’re contributing $6,000 per year. This lowers your total taxable income by $6,000, which can save you a lot of money when you file your taxes. Plus, you’re setting yourself up for success in retirement.
As you go through your spring cleaning checklist, if you donate clothes, kitchen supplies, or other valuable items throughout your house, you can deduct these from your taxes. You can either write off cash donations or the equivalent value of any property you send to Goodwill. Make sure you keep your receipts to prove the value if you plan on using this deduction.
Foreign earned income exclusion
If you’ve always dreamed of selling everything you own and moving abroad, now might be a great time to do it. The Foreign Earned Income Exclusion allows you to avoid paying income tax up to a certain threshold that changes every year, provided you meet the eligibility criteria. The most common way is to meet the physical presence test, which means that you are physically located outside the U.S. for at least 330 days out of the year. Since we’re already a few months into the year, you won’t qualify for this when you’re filing 2023 taxes, but you could qualify the following year. For 2023, the income threshold is $120,000, meaning you don’t have to pay any income tax up to that amount. Note that if you are self-employed, you are still liable for self-employment tax.
The IRS makes the tax code very complicated, but there are plenty of opportunities for the average American to save big on taxes. You just need to know where to find them.
If you are creative, there are things you can do to lower your tax burden. As always, you should consult a tax expert to verify that you qualify for these deductions, as well as to find out about other deductions that aren’t on this list.