It’s that time of year again when peoples’ hands start to get sweaty as they try to locate their W2s. It’s tax season.
The thought of flipping through countless documents while figuring out which box to check on your tax forms can be enough to drive someone crazy. But the good news is that we are here to hopefully help you save a little time, energy, and maybe even some hair.
Now tax season doesn’t have to be something that makes you feel nervous or uneasy. With proper planning and preparation, you should be able to legally reduce your overall tax burden. Often, one of the biggest mistakes that people make when doing their own taxes is not taking advantage of tax credits and deductions.
What is a Tax Credit?
Credits are often seen as more valuable to taxpayers than deductions are. One reason for this is that a tax credit is a dollar-for-dollar reduction in your actual tax bill. In some instances, credits can even be refundable, meaning you will get a check back if your credit is greater than your taxes owed.
What is a Tax Deduction?
The main way tax deductions differ from credits is how it affects your tax bill. With deductions, the IRS allows you to subtract a dollar amount from your adjusted gross income. In turn, this lowers your taxable income, making your tax bill lower.
Types of Tax Credits and Deductions Available to Ohio Residents
Let’s look at a few types of tax credits and deductions that are available to Ohio residents for the 2020 tax year:
Child Tax Credit
If you have children, then you may be eligible for the child tax credit. Parents can receive up to $2,000 for each kid under the age of 17 who lives with them for more than half the year. Once your kid turns 17, the tax credit drops to $500.
One factor that can affect your eligibility is your income. Individuals who make $200,000 or more do not qualify, as well as married couples making over $400,000 and filing jointly.
Earned Income Credit
For taxpayers whose income is considered low or moderate, there is an opportunity to receive the earned income tax credit. To be eligible, you must meet the following criteria:
- A single filer with income less than $15,820
- Joint filer with income less than $21,710
- Investment income below $3,650
If you are eligible for the credit, you can expect to receive anywhere between $538 and $6,660 depending on the amount of income, how you file, and a number of children you have. Since the credit is refundable, any portion of the credit left over will be paid out to you.
Anyone who adopted a child in 2020 may be eligible for an adoption credit. The credit typically covers up to $14,300 in adoptions costs per child. For those who either make more than $214,520 in adjusted gross income or are adopting your spouse’s child, the credit won’t be available.
American Opportunity Credit
For students who are in their first four years of college, the American Opportunity Credit may allow for up to $2,500 in credits. The money received for the credit is to help cover the cost of tuition, activity fees, books, supplies, and equipment. In order to qualify for this credit, you must meet the following requirements:
- Students must be enrolled at least half time without any felony drug convictions
- Adjusted gross income can’t be higher than $90,000 for single filers
- Adjusted gross income can’t be higher than $180,000 for joint filers
Residential Energy Tax Credit
As the country continues to look for ways to shift to renewable energy, the government has issued tax credits for residential energy. One of the biggest tax credits available is the residential energy tax credit. Currently, you can receive 26 percent of the cost of solar energy systems, including solar panels and solar water heaters, under this credit.
Out-of-Pocket Charitable Contribution Deduction
Oftentimes, many people only count the big charitable contributions and forget about the small contributions throughout the year. If you are incurring out-of-pocket expenses while doing good deeds or working with nonprofit organizations, you can typically write that off. For example, if you pay for material for the school’s fundraiser, you can write that off as a charitable contribution.
Student Loan Interest Payment Deduction
As more and more individuals pursue higher education, the student debt levels continue to grow. Luckily, there are ways you can deduct your student loan interest payments to lower your tax burden. As you pay down your debt, you can deduct as much as $2,500 of student loan interest each year.
Refinancing Mortgage Points Deduction
If you refinanced your mortgage this year, you might be able to deduct the points. In fact, if you refinance a 30-year mortgage, you can deduct 1/30th of the points each year. This means that you can save $33 a year for each $1,000 of points you paid during refinancing.
Maximize Your Tax Credits and Deductions
The list of credits and deductions above are only a fraction of what is available to the taxpayers of Ohio. That is why it is beneficial to work with a tax professional who can help you navigate tax season and maximize your tax credits and deductions.
At The JL Smith Group, we take pride in providing our clients with a holistic approach to their financial planning that includes tax planning and tax preparation. If you need help this tax season or want to explore your entire financial portfolio, our team of experts can help. Schedule a complimentary consultation with one of our trusted advisors today.