2016 Tax Guide Part 2: Personal & Business Tax Deductions

Taxes can take a toll on everyone. If you’re an individual or small business owner, you’ve probably paid Uncle Sam a good chunk of change. There is a silver lining, though. Personal and business tax deductions can help reduce your taxable income, which in turn can lower your IRS tax bill.

Consider these personal and business tax deductions when filing your taxes with the IRS:

Personal Tax Deductions

1. Mortgage interest and certain taxes on real estate

As a homeowner, you can write off the mortgage interest you pay on a loan for your primary residence or a secondary residence you may own. To qualify for this deduction, you have to be obligated to paying any debt – and then actually make these payments. Plus, you can write off taxes on any property you own that you do not use for business purposes.

2. Charitable contributions

Any cash and non-cash donations you make to a qualifying charitable organization are generally deductible on your personal income tax return. Non-cash contributions may include clothes, toys, electronics, or even cars and boats. Just be sure you receive proper documentation on these donations from the charity or non-profit, and obtain a receipt if you donate cash or an item with a higher value.

3. Medical expenses and Health Savings Account contributions

You may be eligible to write off your medical and dental costs that exceed a specific percentage of your annual adjusted gross income (AGI). After 2013, you can now deduct 10% of healthcare premiums and out-of-pocket costs not covered by insurance. This means if you made $50,000 in adjusted gross income last year and incurred more than $5,000 in medical costs, you can write off only the excess amount as a deduction.

For individuals with a Health Savings Account, your contributions to this HSA are deductible, and the interest you earn is not considered taxable.

4. Student loan interest

The interest on a loan you take out to cover qualified education expenses for yourself, your spouse, or for your dependent is deductible on your tax return. This education write-off can help reduce your taxable income by up to $2,500.

You are eligible to claim this deduction if the student loan is in your name or your spouse’s name, even if another individual pays the interest on this loan. Keep in mind that the write-off is unavailable for married couples who file taxes separately. Only taxpayers whose modified adjusted gross income (MAGI) is no more than $80,000 (or $160,000 for joint filers) qualify for this IRS tax break.

5. Tuition and fees for education

The tuition and fees deduction can help reduce your taxable income by up to $4,000. Expenses that qualify for this beneficial tax break include tuition, textbooks, course supplies, enrollment fees, lab fees, and other expenses that must be paid to attend a post-secondary school. Expenses like room and board, extracurricular activities, student insurance costs, and other ancillary fees are not eligible for the write-off.

To qualify for this deduction, you must have paid qualified higher education costs for yourself, your spouse, or for your dependent. Expenses paid by your dependent are ineligible for the write-off. You cannot claim the deduction under the married filing separately status. The deduction can only be claimed by individuals earning $80,000 or less in modified adjusted gross income – or $160,000 or less for joint filers.

6. Job and job search expenses

Education and training expenses you incur for your job are deductible if your employer doesn’t reimburse you for them – and if the education is for your current job. Other unreimbursed employee expenses you incur may qualify for a write-off, such as business travel costs.

If you’re looking to advance your career with a better-paying job, you can typically deduct job search expenses as well.

7. Contributions to an IRA

If you have a regular Individual Retirement Account (IRA), you may be allowed to deduct the contributions you make to this retirement account. If you have an employer-sponsored retirement account like a 401(k) to which you make contributions, your deduction on IRA contributions may be limited or unavailable. However, if you aren’t eligible to contribute to such an employer-sponsored retirement plan, you can write off IRA contributions if you earn income during a particular tax year.

Business Tax Deductions

1. Business startup costs

If you are still planning to establish your own small business, there is an important expense category you should know about in terms of tax savings – business startup costs. You can write off up to $5,000 of business startup costs on your return that you incur for investigating an industry, training employees, and other preliminary activities necessary to properly lay the groundwork for a future business or trade. Once your business makes its first transaction, you’ll be able to deduct your ongoing business expenses.

2. Ongoing business expenses

Every business owner will incur a wide range of ongoing business expenses. These will vary based on your specific industry. So, a farmer may have to purchase farming equipment, while a web designer may need to buy special computer software to develop Flash-based websites for large clients. Salaries for W-2 employees or 1099 contractors could also be in your budget, along with rent and electric for a brick-and-mortar shop or accounting and legal fees. In general, all of these costs are considered business expenses and therefore are deductible.

3. Vehicle expenses

A nice tax deduction for which many self-employed 1099 independent contractors and small business owners qualify revolves around vehicle expenses. To claim this write-off on your income tax return, you must use your vehicle for business purposes.

According to the IRS tax code, you must drive from your home office or a separate place of employment to a different place to conduct your particular trade or business.

There are two options when claiming the vehicle deduction – mileage or actual expenses. For mileage, you can document how many miles you drive for business reasons and deduct this amount. The standard mileage rate for tax year 2015 is 57.5 cents per mile. So, you can claim this rate as a deduction for every mile you drive to get from one location to another to perform your trade. On the other hand, claiming actual expenses includes all expenditures you incur for fuel, tolls, maintenance, and vehicle insurance when determining what you spend on any business trips you take. Evaluate both options to determine the best tax savings.

4. Home office expenses

Freelancers and small business owners who perform work activities at home are generally eligible to deduct home office expenses. Deductible home office costs include mortgage interest, homeowners’ insurance, rent, power, water, home repairs, and Internet access. These costs must be directly related to the business-related activities you conduct for them to qualify. Consider designating a specific room in your home where you conduct business, and these costs should be directly associated with this room or space.

Along with the percentage deduction option, there is a simplified flat-rate deduction option. Home-based workers can claim $5 per square foot of home office space for up to 300 square feet. This means the maximum write-off amount on your income tax return is $1,500.

5. Meals and entertainment

Who would think good food and fun entertainment would qualify as an IRS tax write-off? They do if they are directly related to your business – and if they are considered ordinary and necessary expenses. If you conduct a business meeting with a client or fellow business partner at a local steakhouse, you can deduct 50% of the tab as a business expenditure. Be sure to keep the receipt from such a meal, and document the names of those who were present and what type of business was conducted.