One of the best ways to legally reduce your tax bill is to take advantage of tax deductions. A tax deduction is a reduction in your taxable income. It's important to understand that a deduction is not the same as a credit -- nor is it as valuable as a credit, which acts as a gift card applied to the amount of tax you owe.
However, tax deductions can still be quite valuable, since they can reduce the amount of money eligible for taxes. Thanks to tax deductions, chances are that if you make $50,000 a year, you might only end up paying taxes on $30,000 of that money -- or less. As you prepare your taxes, here are some of the most common tax deductions you will run into:
1. Personal Exemption
The personal exemption is one of the most common tax deductions. This is a set amount that is subtracted from your personal income. You can claim an exemption for yourself, as well as for each dependent that you claim (including a spouse). For this year that amount is $4,000 per person. So, if you are married and have two children, you see an immediate reduction in income of $16,000. Not bad.
There are phaseouts, however, once you reach a certain AGI, and there might be other limitations, depending on your filing status, so look into the situation first.
2. Standard Deduction
Another common tax deduction is the standard deduction. If you don't want to itemize your deductions by filling out a Schedule A, you can take the standard deduction, which reduces your income by $12,600 if you are married filing jointly. Other filing statuses come with different standard deduction amounts.
If you aren't sure whether or not it's worth it to itemize, you can get help determining this information by filling out a Schedule A anyway. If the amount is above the standard deduction amount, and you aren't subject to phaseouts and other limitations, it's worth it to itemize. And there are plenty of common itemized deductions as well as the deductions that nearly everyone gets.
3. Charitable Contributions
Once you start itemizing, one of the most common deductions is the one you take for charitable contributions. When you contribute to qualified charities, you can deduct those amounts from your income. These contributions include money you give to charitable organizations and churches (so your tithing counts), as well as donations of goods to charity. You can even deduct the mileage you travel in the service of charity. Just make sure you keep good records, and follow the rules of deduction.
4. Mortgage Interest
For many middle class families, the addition of mortgage interest to charitable contributions can tip the scales in favor of itemizing instead of taking the standard deduction. If you have a mortgage, the interest you pay might be tax deductible, and that can help you reduce your income. Look out for the 1098 from your lender, which includes the amount of interest you paid for the year.
5. Tax-Advantaged Account Contributions
Don't forget that you can deduct the amount you contribute to certain tax-advantaged accounts from your income. If you contribute to a Traditional IRA, 401(k), or HSA, you can receive a tax deduction. It's common for many to receive tax deductions this way -- especially if it's possible to do so through automatic paycheck deductions. This is one of the easiest ways to reduce your income, while saving for a better future.
Before you claim any deduction, though, make sure that you are eligible, and that it makes sense for your financial situation. And if you're having trouble paying your taxes, look for helpful resources online, including on this site.
Miranda Marquit is a professional freelance writer who specializes in personal finance topics. She enjoys writing about saving money and paying off debt at the ReadyForZero blog and also writes for her own blog. She lives near Salt Lake City. You can follow @ReadyForZero and @MMarquit on Twitter.