Tax season can be headache-inducing for some, but it doesn’t need to be. A frequently asked question accountants receive is: what is tax-deductible and how should I keep track of them?
If you haven’t already, start considering keeping track of expenses and donations that can be considered tax deductibles. Here’s the scoop on how and why to track these expenses.
Tax deductibles explained
Your taxable income in the government’s eyes is what is reflected on your W2(s) for the year, but if you file a tax-deductible, your taxable income will decrease.
These deductions are typically expenses, donations, or services the taxpayer reflects that government tax codes, at both a national and local level, qualify someone for paying fewer taxes.
There are two types of tax deductibles to know about. You can claim one of these up until the day of your filing, but not both:
Itemizing your deductions means keeping track of every single qualifying deduction in a year, which most pass-through entities like LLCs and S-Corps will opt for, if possible, to guarantee the value of their business-essential purchases are deducted from their taxable income.
According to the IRS, the following qualify as itemized deductions:
– Healthcare costs including medical and dental bills, and prescription drugs
– Property taxes
– Mortgage interest
– Home office and other job-related expenses
The IRS sets a standard amount for deductions each year based on the taxpayer’s filing characteristics. You can calculate the number of your standard deductions through the IRS.
The biggest reason standard deductions are generally preferred to itemized is that it’s less tedious than listing and tracking every single possible deduction from the year. Instead, people sometimes find that generalized standard deductions offer a higher value than itemized because it is a set, standard amount. This could work for or against you, so it’s best to ask a trusted financial advisor or accountant what will work best for your financial situation.
Why do local and national governments do this?
The IRS provides deductibles as an incentive for economic growth, community service, and education. However, these are only available when you file them voluntarily; the IRS does not require you to file them.
Places for deductions you might not be considering
There are lists available on the IRS site for qualifying deductions, but here are some that are commonly missed.
Student loan interest deduction
If you’ve paid interest toward student loan debt, you can qualify for a deductible of up to $2,500.
Charitable donations deduction
If you donate to qualifying charitable organizations, like Goodwill, you can claim this as a deductible.
Health savings account contribution deduction
The contributions to an HSA are tax-deductible, and the account’s earnings (if invested) are tax-free, as are withdrawals for eligible medical expenses.
Teachers aren’t always reimbursed for classroom supplies, so if you’re in this situation, keep track of what you purchase and you could qualify for as much as a $250 deductible.
All those moving expenses add up quickly, so be sure to track spending on items like boxes, and services like moving trucks. Be sure to take advantage of this one if you have had to relocate for work.
How to track if you’re itemizing
If you opt to itemize tax deductibles, you’ll need to track carefully to remain accurate when it comes time to file. Here are a few suggestions to get you started.
Keep the receipts
It may be tempting to throw away receipts out of habit, but these will be key in the filing process. Dedicate a folder to storing your receipts, or even multiple folders, and organize by month in case you need to reference a purchase quickly.
Start a spreadsheet
Spreadsheets are versatile and helpful, especially when calculating. Consider starting a basic spreadsheet using a free tax expense journal template.
Download apps that track mileage
If you own a small business, do gig work, or drive a lot for your job and plan to deduct travel costs, track your mileage using apps like Mile IQ and Everlance.
Now that you know about tax deductions, you can prepare properly for tax season. Take advantage of all of the available tax deductions you qualify for by speaking to your trusted financial advisor.