A tax break is basically an advantage or reduction of the total tax liability of a person. Tax liability of a person is determined as per the subject of taxation, which in this case, is the person's income tax. A tax break is another name for a tax exemption, tax credit or a tax deduction. The advantage is that the tax breaks are declared by the Internal Revenue Service (IRS) and can be availed quite easily and lawfully by just providing a true and sufficient proof. Tax exemptions or breaks change frequently and there are updates, almost every year.
Tax Breaks for 2012
For the year 2012, there are a range of tax breaks that you could claim, to reduce your overall tax burden. One can either opt for a standard deduction or go for itemized deductions. Opting for implementation of itemized deductions, only makes sense, when your deductible amount is more than the standardized deduction. As a result of rising inflation, IRS has increased the standard deduction amounts in 2012. For household heads, the standard deduction in 2012 has been raised to $8,700. For singles and married couples filing separately, it's $5,950 and for married couples, filing jointly, the standard deduction is $11,900. If your itemized deductions turn out to be more than these standard deductions and you are eligible to opt for them, here are some of the most important itemized deductions and tax credits to benefit from.
Earned Income Tax Credit
For low-income families and individuals who fall in the low-income bracket, the Earned Income Tax Credit (EITC) is a great help. An individual's or couple's eligibility for EITC depends on their earnings in that financial year and the number of children they are supporting. EITC is $5,666 in 2012, for couples with three or more children to support, who fall in the requisite tax bracket. It's $5,036 for couples with two children, $3,050 for couples with a single child and $457 for couples with no children.
Mileage Reimbursement For Vehicle Use
The expenses incurred through vehicle use for business, charity or medical related travel can be reimbursed by the IRS. You either submit actual travel expense bills or opt for a mileage rate based reimbursement. Effective from January 1, 2012, the reimbursement rate for business use is 55 cents per mile, 23 cents per mile for medical or moving related travel and 14 cents per mile, for charity related vehicle use.
American Opportunity Tax Credit
Couples can benefit from the American opportunity tax credit, if they have a dependent pursuing undergraduate studies. This tax credit extends up to $2,500 and almost 40% of it is refundable. An individual with an income range of $80,000 to $90,000 or a couple, filing jointly, with a $160,000 to $180,000 range can benefit from this tax credit facility. Those exceeding these income ranges are not eligible.
Medical and Dental Expense Benefits
If your total medical expenses for the entire year are more than 7.5% of your adjusted gross income, you may claim a deduction, on the difference. In other words, every penny greater than 7.5% of the gross income, spent on medical expenses, can be claimed as a deductible. After December 31, 2012, the limit for deductions, will be any amount exceeding 10% of the gross adjusted income.
The points you pay while getting a mortgage, which are a type of prepaid interest, can be claimed as a tax deduction. However, you may only claim deductions on home mortgage points in the year you paid them. Deduction can also be claimed for home mortgage interest payments. First-time home buyer's tax credit can also be availed. For more details, refer IRS website.
You may claim tax deductions on state, local and foreign taxes paid in the year of assessment. This includes estate tax, vehicles tax, sales tax, state and income taxes.
Tax deduction can be claimed on the basis of charitable contributions made in the assessment year. Only donations made to qualified institutions are considered. Individual contributions are not taken into consideration.
You may claim deductions for educational expenses incurred in that financial year. The education must strictly be related to your current field of work.
For comprehensive information regarding the eligibility conditions for each of the other tax deductions, visit the IRS website. Keeping your expense receipts throughout the year and maintaining a daily record of your expenses, can help you benefit from these tax credits offered by the IRS. Taxation is inevitable, but you can save a lot by qualifying for any of the above tax breaks.