Source: Flickr user Calgary Reviews.
As tax time approaches, few people are excited to dissect a year's worth of receipts, wage slips, and brokerage account statements. Yet federal income taxes play a huge role in boosting the economy and forcing consumers to save. In 2011 more than 80% of tax filers received a refund from the IRS, resulting in a nice boost for the economy and hopefully padding some emergency funds and investment/retirement accounts.
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In fact, tax time can be quite lucrative for the average consumer. Per Bankrate, some of the biggest tax breaks that consumers can take advantage of are forecast to save nearly $3trillion cumulatively through 2018.
Let's have a look at six popular tax breaks that consumers can take advantage of so you don't overlook them and miss out on big savings.
1. Capital gains and dividendsOne of the easiest things individual investors can do to keep more money in their pockets and out of Uncle Sam's is to simplyhang on to their investmentsfor a period of more than one year. If you hold your investors for a minimum of a year and a day, your capital gains taxes drop to 0%, 15%, or 20%, depending on your marginal tax bracket. Compare this to short-term capital gains, which are taxed at the ordinary income tax rate (10% to 39.6%), and the difference works out to $633 billion in savings through 2018, according to Bankrate.
Capital gains savings can also be realized by selling a residence you've owned and lived in for a minimum of two of the past five years. If you meet these conditions, you can exclude up to $250,000 in capital gains from taxation if you're single and up to $500,000 if you're married and filing jointly.
2. Mortgage interest deductionOne of the most lucrative tax breaks for homeowners is the mortgage interest deduction. This tax break allows home-owning taxpayers to deduct the amount of interest paid on their loan against their income for the prior fiscal year. You could say it's one reason why taking out a mortgage is such an attractive means to eventual home ownership.
Source: Flickr user Pallspera.com.
A quick word to the wise, though: There are limitations on what you can deduct. First, the mortgage interest deduction needs to be itemized, and it must amount to more than the standard deduction. Further, the deduction is limited to a first or second home, meaning you can't write off interest paid on your portfolio of 10 owned homes. Lastly, interest is only deductible on the first $1 million of debt used in the acquisition or construction of the property, or the first $100,000 of qualified home equity loan.
3. State and local taxesAnother source of hefty savings for taxpayers is the ability to deduct state and local taxes. One of the most popular tax deductions you may have previously claimed is the deduction for property taxes. Not only does the IRS allow you to deduct property taxes, but some states actually give property tax breaks to seniors up to a certain dollar amount. Ultimately that can translate into some nice savings for taxpayers.
Additionally, since Congress approved thetax extenders billthrough Dec. 31, 2014, residents in some states (including my own state, Washington) will be able to take a standard sales tax deduction -- or, if they've documented their receipts and/or made large purchases, itemize their local sales tax for potentially bigger savings. Combined, these state and local tax deductions work out to more than $315 billion in savings through 2018.
4. Earned Income Tax CreditThe EITC is a credit given to American workers with low to moderate incomes that helps reduce their taxable income or may even provide a refund if their taxable income is $0. It's a particularly useful refund for families, providing bountiful deductions for those with children.
Source: Flickr user Charlie Kaijo.
The EITC is also one of the most missed credits -- and one of the most abused. The IRS believes a good 20% to 25% of people who are owed this credit aren't receiving it because they don't believe they need to file their taxes, given that their taxable income was $0.Meanwhile, IRS officials believe 20% of all EITC payments refunded to tax filers each year are fraudulent. Because of this, the IRS is trying to step up audits on taxpayers who claim $0 in taxable income but are receiving a refund. Take a closer look at the EITC income limits provided by the IRS to see whether you qualify in 2014.
5. Social Security benefitsSocial Security benefits are another area where consumers have an opportunity to keep more of their earned income in their own pocket as opposed to handing it over the Uncle Sam -- although it depends on where you live and how much money you made in the prior year.
For example, there are more than a dozen states that currently tax Social Security benefits at some level up to the ordinary tax rate, meaning that if you live in these states, paying tax on your benefits may be inevitable. But on the flipside, select states grant tax exemptions to retirees up to a certain level of income. All told, for Social Security recipients who live in the right place and/or make less than a certain annual amount, the savings add up to billions of dollars in savings nationwide.
Source: HM Revenue & Customs via Flickr.
6. Charitable donationsLastly, Bankrate estimates that Uncle Sam may be out up to a quarter-trillion dollars when you factor in deductions for the donations Americans make to the countless qualified organizations. At least we can feel good about where this money is going.
Although charitable contributions don't get you a dollar-for-dollar deduction, they can nonetheless reduce your taxable income, and they obviously support causes you feel strongly about. Bankrate notes that more than 33 million people made a charitable contribution in 2012, working out to nearly one in four taxpayers. But one word of caution here: If you don't have a receipt for your charitable donation, you shouldn't claim it!
The article These 6 Tax Deductions Will Save Taxpayers Almost $3 Trillion Over the Next Few Years originally appeared on Fool.com.
Sean Williamshas no material interest in any companies mentioned in this article. He wishes he could deduct veterinary medical expenses in 2014! You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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