The end of the year is quickly coming upon us, and with it comes your last chance to take advantage of some last minute tax deductions for the 2010 tax year, in addition to planning ahead for the tax credits you're going to claim. If you’re anything like me, you'll do what you can in order to ensure that more of your money stays in your pocket. So what are some of the credits and deductions you can claim in 2010?
10 Tax Credits And Tax Deductions
- Bump up your contributions to your retirement account: Max out the contributions to your 401k, 403(b) or IRA to lower your taxable income. With an IRA you can contribute up to$5,000, $6,000 if you are 50 or older. For a 401k or 403(b) the contribution limit is $16,500 , or 22,000 if you’re 50 or older.
- Write off investment losses: If you have lost money on your investments, you can deduct up to the $3000 in investment losses against normal income each year if your losses exceed your gains. Also known as tax loss harvesting.
- Home Improvement Tax Credits: You can claim up to a $1500 tax credit for certain energy efficient improvements to your home. Details here.
- Make tax deductible donations to charity: You can claim a deduction for certain eligible donations to charity. Make sure the charity is legitimate!
- Deduct medical costs: If you’ve had a lot of medical expenses during the year, you can deduct the amount of your medical and dental expenses that is more than 7.5% of your AGI. Details here.
- Child care credit: You can claim up to $6000 in child care expenses, but pre-tax spending accounts via workplaces usually have a $5000 limit. If you spend above that $5000, you are still eligible to claim an additional $1000, and save more by reducing your taxable income!
- Prepay your mortgage or real estate taxes: You can prepay your mortgage or real estate taxes, even if they’re not due until January. You can then deduct them on your 2010 taxes!
- Job hunting expenses: Looking for a new job? add up your expenses from mailings, travel, agency fees and resume preparation. Those job hunting expenses can be tax-deductible, as long as you are looking for a new job in the same field, and your costs are at least 2% of your adjusted gross income. This expense has to be itemized as “Miscellaneous”.
- Moving expenses to take first job: While you can't deduct expenses incurred looking for your first job, you can deduct expenses to move to a new location for that first job. If you moved more than 50 miles, you can deduct 16.5 cents per mile of the cost of getting yourself and your household goods to the new area, (plus parking fees and tolls) for driving your own vehicle. [source]
- Refinancing points: If you refinanced your house, you get to deduct the points you paid, over the life of the loan. That means you can deduct 1/20th of the points a year if it’s a 20-year mortgage—that’s $50 a year for each $1,000 of points you paid. Doesn't seem like much, but it's something!
- Bonus Tip – Challenge your property taxes: If you haven’t checked to see the value your county has assessed your property at, you may be paying too much in property taxes. Appeal your property taxes and save hundreds per year. Detail on how to do it here: Challenge property taxes.
What Is The Difference Between A Tax Deduction And A Tax Credit?
One thing a lot of people don't understand is the difference between a tax deduction and a tax credit. Generally a tax deduction will allow you to reduce the amount of taxable income that you have in that year. A tax credit will allow you to actually reduce the amount of taxes that you pay. So in most cases a tax credit will lead to a bigger reduction in your taxes.
For example, if you have $50,000 in taxable income and you’re in a 25% tax bracket, here is the difference between a $1000 deduction and a $1000 credit. If you have a $1000 tax deduction – you would then have $49,000 in taxable income – and you would pay $12,250 in taxes. If you have a $1000 tax credit you would then pay $11,500 in taxes. That’s a big difference!
Are there other tax credits or tax deductions that you think people should remember this year when filing? What tax deductions and credits are you taking advantage of this year? Tell us your thoughts in the comments!