Tax deductions can leave you with a wonderful nest egg depending on how well you plan ahead. The way taxes can help you plan your future is by the means of tax deductions.
Your income subtracts tax deductions and the amount that is left behind is subject to state and federal income taxes. In other words, they reduce the amount of income tax you would normally have needed to pay by decreasing your taxable income.
The IRC (Internal Revenue Code) includes deductions for making charitable contributions and medical expenses – to name a few. The IRC does help with retirement too by offering retirement-friendly tax credits.
The Standard Tax Deduction
The TCJA (Tax Cuts and Jobs Act) nearly doubled the amount of standard deductions for all filing statuses when it went into effect in 2018, and those taxpayers who are of the retirement age now get an additional amount over the norm. The Standard Tax Deduction is as follows:
• $1,650 if you’re single or file as head of household
• $1,300 if either you or your spouse are 65 years old or older or are blind and you file a joint married return
• $2,600 if both you and your spouse are 65 years old or older or are blind and file a joint return
Deducting 401(k) Plan Contributions
Contributions to qualified retirement plans like the traditional 401(k) plans are tax-deductible. If your employer offers this benefit, your 401(k) tax contributions are deducted from your taxable income. Many employers offer to make your contributions that are a great benefit come retirement.
For the tax year 2019, you may contribute up to $19,500 for the whole year. On your tax return, you cannot deduct these contributions again on your tax return, because you have already taken advantage of this benefit.
It is a very easy way to contribute to your retirement because it is automatically taken out of your paycheck. There really is no good reason not to take advantage of this. You will not miss the money on your paycheck. It’s like a hidden piggy bank that you will forget is even there until retirement. When you retire, it will be like a beautiful bouquet of roses showing up unexpectedly!
The Tax Credit for the Elderly and Disabled
The IRC (Internal Revenue Code) offers a tax credit specifically for those taxpayers who are 65 years old or older or those who are retired and on total and permanent disability and who received taxable disability income for the year. Many seniors and those who are disabled earn a very low income and have financial challenges. This tax credit can greatly help those individuals.
It is quite complicated to calculate this tax credit, but it can be significant if you qualify. There are limits to Social Security income and some pension incomes.
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HSA (Health Savings Account) Contributions
An HSA (Health Savings Account) is a tax-deductible savings plan that enables you to save pre-tax dollars for healthcare expenses.
For the 2019 tax year, the contribution minimum is $1,350 and the contribution maximum is $3,500 for individuals. The contribution minimum is $2,700 and the contribution maximum is $7,000 for families.
They provide an outstanding way to save for retirement because there are no fees or penalties for using your HSA for non-medical expenses once you reach retirement age.
Another benefit of an HSA is that it can lower your AGI (Adjusted Gross Income) leaving you open to take other tax deductions and credits that you normally would not qualify for if your AGI were normally too high.
The normal retirement planning tax deduction is the traditional IRA. You may claim a deduction for up to $6,000 in annual contributions in 2019—if you meet certain requirements. This deduction will increases to $7,000 if you’re 50 years old or older and make contributions.
Not only does this deduction allow you to contribute to your retirement savings with untaxed dollars, but it’s also an “above the line” deduction or adjustment to income. You don’t have to itemize to claim it. You can take it and claim the standard deduction or itemize your deductions as well.
The Medical Expense Deduction
The Medical Expense Tax Deduction is only available to taxpayers who itemize their deductions. This can be quite convenient if you spend most of your income on medical expenses.
The allowable expenses for this deduction include medical expenses, dental expenses, prescription medications, non-prescription medications, medical supplies, and mileage expenses needed for these things.
You may deduct the portion of your uninsured, out-of-pocket medical expenses if it exceeds 7.5% of your AGI (Adjusted Gross Income) in 2019, the income tax return you are filing in April 2020.
Tax Deduction vs. a Tax Credit
Both tax deductions and tax credits can lower your income tax bill. A tax credit directly decreases the amount of income tax you owe. A tax deduction lowers the total amount of taxable income. Therefore, they are both beneficial to taxpayers just in different ways.