With tax day right around the corner, everyone is trying to maximize their return. And with the current tax system there's always little deductions that you can add to help you get a bigger tax break. There are many deductions and credits that can be confusing to follow. Some deductions only work if you itemize your deductions, which is favorable in some cases. While other deductions will lower your taxable income regardless. These tax tricks and tips can help you understand the tax system and maximize your return this year.
Deduct the interest on your student loans
For every dollar you spent on student loan interest, up to $2,500, you can deduct it from your income. The $2,500 is available to those who earned under $65,000, while those making between $65,000-80,000 can deduct a lower amount of interest. This means that your taxable income can be lowered by up to $2,500, even if you take the standard deduction. This will lower the taxes you pay based on the bracket that you are in. If you are in the 22% bracket, this will save you $550 in taxes.
Those who work from home can claim a home office
If you regularly use an area of your home, such as a spare bedroom, exclusively for business related work then you could be eligible to claim a home office as a deduction. This tax trick allows you to claim a simple deduction of $5 per square foot for up to 300 square feet. Or you can do a more difficult method where you calculate the percent of your mortgage and insurance that goes towards your office. If the difficult method you can also use expenses related directly to your home office, such a painting and supply costs. Remember that this room must be exclusively used as an office.
Be careful with this deduction because there are some downsides to consider. One is that you may have to pay capital gains on a home if you claim it has a home office. However, this is only the case when you use the actual expense method to calculate the deduction. Using the actual expense method also means you have to calculate depreciation on your home.
Max out retirement plan contributions as a tax trick
One easy way to increase your tax break is to maximize the amount you contribute to retirement plans. If you maximize what you put into your 401K or traditional IRA, it will decrease your taxable income. The max contribution for 2018 is $18,500 for a 401K and $5,500 for an IRA. However, you typically can not put more into an IRA than you earned for that year. This can reduce your income to a lower bracket and lower the amount you pay. The added bonus is that it allows you to invest your income and allows it to grow over time.
Deduct costs for installing solar energy
You can also get a tax credit for 30% of the cost for installing solar panels in your home. This deduction applies to all solar energy sources installed by December 31, 2019. This doesn't just apply to solar energy, but also other systems such as small wind-energy property, geothermal pumps, and more. If you plan on installing such a system, do so soon, because the credit gets smaller with time and completely vanishes in 2022.
