Tax Breaks: How to Get the Most From Your Tax Return

With tax season upon us, you want to be sure your return is filed accurately, but also that you take advantage of any tax breaks that you’re legally entitled to. There are two major types of tax breaks — credits and deductions. A tax credit directly reduces the amount of your tax bill, while a deduction reduces your taxable income. While there are a multitude of credits and deductions to look into, the following are some of the most readily accessible for families.

The American Opportunity Tax Credit

According to the IRS, the American opportunity tax credit offers a 100 percent credit for the first $2,000 in eligible college tuition and fees, and 25 percent of the amount above that up to a maximum credit of $2,500. This credit can be claimed by parents of a dependent student or the student themselves.

The Child and Dependent Care Credit

If you’re a parent, you know day care can get expensive. The child and dependent care credit can be worth up to 35 percent of the amount you spend for qualified child care expenses, according to the IRS.

However, if your employer offers a child care reimbursement account that allows you to pay for child care costs with pretax dollars, it could be an even better deal than this credit. In some cases, you may be able to use both.

The Child Tax Credit

Parents can receive a $1,000 credit for each child from birth through age 17, according to the IRS. There are income phase-outs of the credit that vary based upon your filing status, as well as several other requirements to claim this credit, so be sure to research rules and limitations before claiming it.

The Retirement Savings Contributions Credit

You may be eligible for this credit, known as the Saver’s Credit, if you make contributions to a traditional IRA account or a retirement plan through your employer. The credit ranges from 10 to 50 percent of the amount you contribute to a retirement plan, according to the IRS. It’s worth noting that there’s an income ceiling if you have access to a retirement plan such as a 401(k) at work. But if you’re not covered by a workplace retirement plan, there are no income ceilings.

The Self-Employment Tax Deduction

If you’re self-employed, you pay both the employee and employer portion of the Social Security and Medicare tax in what’s known as the self-employment tax. You can deduct the employer-equivalent part of this tax on the first page of your return as an adjustment to your gross income, notes the IRS.

The Home Mortgage Points Tax Deduction

There are several tax breaks for homeowners. Often when obtaining a mortgage, you’ll pay points to originate the loan. When you buy a house, you can deduct the points paid in the year you purchased the home, according to the IRS. With refinancing, you’ll need to deduct the points over the life of the loan. Use the IRS Interactive Tax Assistant to determine if you’re able to deduct expenses related to your mortgage.

Tax breaks in the form of deductions and credits will vary based on your situation, including your income and the types of activities and transactions you’ve engaged in during the year. Most credits and deductions have specific rules, so it’s always a good idea to consult with a tax professional about your situation.

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