Worried About Taxes? 3 Ways to Deduct Like a Pro
To say that the tax code is simply complicated would be an understatement. The tax code is possibly the biggest bureaucratic specter hanging over the United States. In its entirety, the document is over 4 million words long, which, if printed, would occupy nearly 74,000 regular 8.5-inch by 11-inch pieces of paper. This enormous document is edited so many times per year that the changes work out to averaging more than one per day. Americans spend an estimated 7.6 billion hours each year doing taxes or jumping through tax-related hoops — that’s about 24 hours for every person above the age of 18, or three full work days. The White House estimated in 2010 that American taxpayers sink about $140 billion worth of lost productivity into doing taxes.
Filing taxes has assumed a legendary reputation for being tedious and frustrating, but when all is said and done, though — when you’ve done your penance and given 24 hours of your life to the IRS, along with all those dollars — there is probably nothing more frustrating than finding out that you owe more money than you initially thought. Either your withholding wasn’t high enough, your estimates were off, you lost some deductions, or were somehow penalized, but every year millions of Americans end up having to write an extra check to Uncle Sam.
Here are a couple of ways to beef up the deductions and credits section of your return to help make sure that doesn’t happen — or, if it must, that the year-end damage is as minimal as possible.
1. Educate yourself
A little knowledge can go a long way, and as much as we love to hate Uncle Sam around tax season, he does want to incentivize us to look after ourselves. The lifetime learning credit allows people pursuing higher education to file for a credit worth up to $2,000. You can claim the credit for qualified education expenses, such as attending classes at a local college or university, or pursuing certain kinds of profession education.
Here’s the particularly appealing thing about the lifetime learning credit: it’s a credit. Where deductions reduce your taxable income, credits cut right to the chase and reduce the amount of tax you actually have to pay. There is also no limit on the number of years that you can apply for the credit. Keep educating yourself, and you can continue to reduce your tax bill for years to come while expanding your knowledge base. You can also file for this credit if you paid the education expenses for a dependent or a spouse.
Keep in mind that the lifetime learning credit is a nonrefundable credit. This means that it can reduce your tax bill to zero, but it cannot reduce your tax bill below zero (that is, the credit can’t transform into a refund). Those who are married but filing separately do not qualify, and neither do those with a modified adjusted gross income of more than $63,000 (or $127,000 for joint filers).
2. Business expense deductions
“In general,” writes the Internal Revenue Service in its guidance, “taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.”
If you’re a contractor, freelancer, or you own your own business, you’re probably already very familiar with the various ways that you can (or can’t) deduct expenses related to your work. But these deductions aren’t just for the self-employed — even those with a 9-to-5 can deduct appropriate business expenses, such as lunch with potential clients or that 200-mile drive to meet with (you guessed it) a potential client.
Other common business expenses include subscriptions to professional newsletters or trade magazines, the acquisition of office supplies (including electronics) for a home office, or rent for a property you use to conduct business (including a home office).
3. Bad debt
Believe it or not, banks aren’t the only ones that have to charge off bad sometimes. If you’ve made a personal loan that has gone totally sour, you can file for a deduction for the value of the loss. There are some stipulations, of course. First, you need to have evidence of the loan, usually some form of promissory note. Second, the debt must be totally worthless. Third, you must have made reasonable attempts to collect on it. You cannot deduct partial losses for bad debt, only total losses.