Tax Advantages for W-2 Employees
When it comes to taxes, no one wants to pay more than they have to. While there are plenty of ways to reduce taxes by itemizing deductions, such as charitable contributions, it’s important for taxpayers to understand the tax advantages available without itemizing.
According to the IRS, nearly 90% of taxpayers claim the standard deduction. This means the vast majority of employees are not using itemized deductions to reduce their taxable income. The good news is there are several other ways W-2 employees can reduce their tax liability. It’s important for employees to understand the tax advantages available to them so they can strategize their spending throughout the year and make the most of their money. Below are several ways employees can reduce their tax liability without itemizing deductions.
Tax Credits and Deductions
Child tax credit and Child & dependent care credit. These are two credits primarily targeted toward parents to provide relief for the cost of raising children and paying for childcare.
American opportunity tax credit and Lifetime learning credit. These credits encourage higher education by allowing taxpayers to claim money spent on tuition, books, school fees, and so on (up to specified limits) for higher education.
Student loan interest deduction. Student loan borrowers can write off the amount of student loan interest they paid throughout the year, up to specified limits, and don’t need to itemize to claim this deduction.
HSA contributions. Health Savings Accounts are considered triple tax advantaged. This is because contributions are tax deductible, withdrawals are not taxed, and earnings are not taxed. Additionally, qualified medical expenses can be deducted from taxes if they are more than 7.5% of the taxpayer’s AGI and are not reimbursed.
Retirement contributions. 401(k) contributions are tax deductible, and traditional IRA contributions may be tax deductible depending on income levels and eligibility for an employer-sponsored retirement plan.
Early withdrawal penalties. Banks typically charge a fee for early withdrawal from CDs and similar time-deposit accounts. These fees are tax deductible.
Alimony. Alimony payments are tax deductible if the taxpayer’s divorce was finalized before 2018.
Educator expenses. Teachers and other educators who work in elementary schools or secondary education schools can deduct education-related expenses without itemizing.
Business expenses. Some taxpayers may qualify for business expense deductions including members of the National Guard and Reserves, qualified performing artists, fee-based state or local government officials, and employees with impairment-related work expenses.
Conclusion
The main benefit of claiming the standard deduction is that it makes filing taxes much easier. Itemizing requires diligent record-keeping and reporting and is beneficial for taxpayers who have deductions that would exceed the standard deduction. But employees who either don’t have those expense deductions or don’t have records of them can still save significant amounts of money on taxes by taking advantage of above the line deductions and credits.
Find out how 101 Financial’s Workplace Wellness program teaches employees to find tax advantages to reduce their overall tax liability.
Sources: IRS, NerdWallet, SmartAsset, Finance Buzz