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Do you know someone who likes to pay income taxes? We certainly don't. And we definitely don't enjoy paying ours. Last year, we had to pay Uncle Sam an extra $800 and I can't tell you how much that pained us. It may be awhile before income tax time actually rolls around but now is a good time to start thinking about your taxes. So, here are 9 ways to pare down your income taxes that are often overlooked but could save you some real money – assuming that you itemize. If you don't, you can stop reading at this point because none of these 9 tax breaks can help you.
If you need after-school day care for your kids while the two of you are at work, you're probably already claiming the Child and Dependent Care Credit to help cover those costs. But many parents overlook the fact that they can claim a credit for childcare costs incurred during the summer. This tax break even applies to day camp. The important key here is that it must be a day-only camp and that the child is supervised while you work. In other words, you can't claim costs related to overnight camps.
Mortgage loan points
If you buy a house and have to pay points on the loan, you get to deduct them the year you purchased the house. If you refinance your home loan you might be able to write off those points, too, so long as you used the proceeds from the refinanced mortgage to improve your main residence.
There is a retirement savings credit that you may be able to take advantage of if you're a moderate- or low-income taxpayer. The way this works is when you put money into either an individual retirement account (a Roth or traditional IRA) or a plan where you work, you may be able to get a tax credit of as much as 50% of the initial $2000 you contribute. This means you would get a $1000 tax credit and this is a tax break that would directly reduce dollar-for-dollar any taxes you might owe.
Since this credit was changed some years ago, your itemized medical deductions must be at least 7.5% percent of your adjusted gross income before you can claim them. This can be a tough threshold to reach. But it may not be as difficult if you include miscellaneous medical costs, such as travel expenses to and from medical treatments, alcohol- or drug-abuse treatments or insurance premiums you pay out of income that has already been taxed.
The IRS has a tuition and fees deduction that would allow you to take as much as $4000 off your taxable income and you don't even have to itemize. Plus, there is the American opportunity tax credit, which provides a dollar-for-dollar tax break of up to $2500. This was created as part of the 2009 stimulus package and was extended through the tax year 2017 as part of the American Taxpayer Relief act.
If you have a child in or about to enter college, there are other tax breaks you should be aware of as discussed in this video.
Energy-efficient improvements to your home
There used to be some really generous tax breaks for home improvements that made your house more energy efficient, Unfortunately, they expired at the end of 2010. But you might still be able to get a tax credit of up to $500 on your 2012 and 2013 returns. However, the tax credit is just a third of what used to be available. Plus, you must now pay attention to specific spending limits. This includes $300 for air conditioners and heat pumps, $150 for high-efficiency furnaces and $200 for replacement windows. If you received any previous energy tax credits since January 2005, you would have an overall $500 tax credit cap. But if you do qualify, this tax credit would give you a dollar-for-dollar reduction of your tax bill. And of course, when it comes to taxes every saved dollar helps.