What Can You Include in Your Taxes?
- The Internal Revenue Code makes it easy for you to determine which types of income to report on your taxes by including all income “from whatever source derived.” Essentially, everything you receive, whether in property or cash, is part of your gross income unless there is a specific tax law that exempts it. Common types of income that the federal tax law exempts includes interest you earn on municipal bonds and Series EE and I U.S. Savings Bonds. You also can exclude any gift or inheritance you receive.
- All taxpayers can claim one personal exemption, provided no other taxpayer claims them as a dependent. You also can claim exemptions for the dependents you report on your return. However, before you claim dependent exemptions, ensure you satisfy the qualifying child or relative rules. For example, to claim exemptions for your children, they must reside with you for more than half the tax year, not provide more than half of their own financial support and be under the age of 19 unless they are full-time students at the end of the tax year, in which case you can claim them until they reach the age of 24.
- There is no shortage of deductions you can claim for the expenses you pay throughout the year; however, each deduction has its own set of eligibility requirements you must adhere to before claiming it. If you choose to itemize your deductions instead of claiming the standard deduction, this doesn’t allow you to claim every possible deduction that Schedule A allows. For example, there are a number of expenses you can deduct that relate to your personal residence, such as mortgage interest, mortgage insurance premiums, real estate taxes and home equity loan interest. However, don't assume you can deduct all four of these expenses just because you own a home. Each of the four deductions imposes separate requirements, and satisfying the eligibility requirements to claim mortgage interest, for example, doesn't automatically entitle you to claim home equity loan interest, as well.
- Tax credits are extremely effective at reducing your tax liability since they provide a dollar-for-dollar savings on the tax you calculate on your taxable income. In contrast, a deduction only reduces your taxable income before you calculate the tax. Evaluate whether you are eligible for tax credits such as the child and dependent care credit, the adoption credit, the lifetime learning and American opportunity credits for your education expenses or those of your dependent, and the retirement savings contributions credit for contributions you make to a qualified IRA.
