The current U.S. tax code is rife with potential deductions, credits and exemptions that can significantly reduce the average taxpayer's tax liability. If you earn a significant amount of income and own your own home, there's a good chance that you're already "itemizing" your tax deductions. This is the process of claiming multiple tax deductions on your year-end tax return. Taxpayers who earn less income or have simpler tax situations tend to claim the so-called "personal deduction." This is a one-off item that reduces a taxpayer's tax liability without permitting him or her to make additional deductions. Although its value fluctuates from year to year, it's typically worth more than $10,000. Depending upon your tax bracket, this could save you as much as $4,000 in taxes.
If you're itemizing your deductions, you should keep close track of all of your mortgage statements and charitable-donation receipts. After all, these are the two most important deductions that you're likely to be able to claim. For its part, the Mortgage Interest Tax Deduction is a valuable tool that could save you $1,000 or more on your year-end tax liability. The IRS's various charitable-giving deductions may be even more lucrative.
Before you itemize your charitable donations, you'll need to attend to several matters. First, organize all of your donation receipts. These might include cancelled checks, credit card statements, or itemized records from thrift organizations like the Salvation Army. Once you've done this, determine whether any single donation amounted to more than $500. If you have donations that meet this threshold, you'll need to file a separate form known as "Form 8283" for each qualifying donation. You'll include these forms with your electronic or paper tax return.
Smaller donations don't need to be itemized using this special type of form. However, they do need to be tallied and cataloged. As such, you'll need to add up the total value of your donations and enter that number in the appropriate place on your tax return. This total will include the larger donations that require the additional form.
The provisions for claiming charitable donations as tax write-offs are extremely generous. These deductions are tied to a sliding income scale that permits higher-earning taxpayers to write off tens of thousands of dollars in charitable donations. At the moment, the IRS permits you to write off half of your total income in this manner. If you earned $100,000 last year, you can write off up to $50,000 in charitable donations.