Tax Deductions During Life Transitions

June 12, 2020 by First Federal Bank

Life Change DeductionsAs you transition into different stages of your life, you may be able to save more on your taxes with new and bigger deductions. The following are a few of the major ways you can do so.

Education deductions

Education is expensive, but deductions can help you get some of your money back. If you were a student in 2019, the IRS offers a number of education-related deductions that range from tuition and fees to student loans and education you sought for work purposes — even if you are self-employed.

“If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income,” the IRS says. “This reduces the amount of your income subject to both income tax and self-employment tax.”

According to tax law expert Beverly Bird, you can also claim up to $2,500 in interest you paid on student loans during the 2019 tax year. Additionally, you may be able to deduct expenses on books and supplies purchased for your education, depending on what these purchases amounted to.

These deductions not only cover your education and your spouse’s education, but your dependent’s education as well. If you are preparing for your children to go to school, you can invest in a 529 plan to save for their education from kindergarten to graduate school. The earnings in a 529 plan aren’t taxed, and according to Investopedia finance editor Julia Kagan, more than 30 states provide tax deductions or credits for contributions.

Retirement savings

If you started working full-time in 2019 and your employer allowed you to make contributions to a 401(k) or IRA, you have already benefited from lower taxes. Contributing to a retirement account not only helps build your late-life financial cushion, it also helps you save on taxes, as the portion of your income that goes into your 401(k) account comes out before taxes are applied. However, the bonuses don’t stop there. According to the IRS, eligible contributions to your employer-sponsored retirement plan can also allow you to take a tax credit. “The amount of the credit is 50%, 20% or 10% of your retirement plan or IRA or ABLE account contributions depending on your adjusted gross income,” the IRS says.

Medical expense deductions

If life changes in 2019 came with new medical expenses, many of them can be deducted when you file your taxes. Tax expert Tina Orem says that you can deduct qualified, unreimbursed medical expenses that are more than 7.5 percent your adjusted gross income in 2019 — down from 10 percent in previous years. For example, if you earned $50,000 in 2019, anything you spent on medical bills after passing the $3,750 mark could be deductible. IRS Publication 502 features the full list of qualifying expenses, and it’s a long one. It includes hospital and nursing home care, prescription drugs, addiction programs, payments to doctors, insurance premiums and even the cost of traveling to and from medical care.

Family deductions

Starting and growing a family is a major life change, and like many others, it’s one that can help you net a few more tax deductions. With the Child Tax Credit, for example, you can owe $2,000 less on taxes per eligible child. If you send your children to camp so you can focus on work during the summer, you may also be able to deduct up to $3,000 from your taxable income via the Child and Dependent Care Credit.

If you started taking care of a non-child dependent in 2019, such as a parent, grandparent or even a friend, Bird says you may also be able to claim a $500 Other Dependent Credit per eligible dependent.

Life is a constantly evolving thing, and with many different deductibles and credits available, it can be difficult to ensure you’ve taken full advantage of every one when it’s time to file your taxes. If you’ve gone through many life changes in 2019 or in any year for which you are preparing taxes, it can pay off to hire a tax professional to help you.

Categories: Saving Money, Taxes