The tax return: what you should know

The tax return is a document that taxpayers in the United States use to report their income, deductions and tax credits to the Internal Revenue Service, and in many cases also to their state tax authority. It is used to determine the actual tax liability for the year and to ensure that the correct amount of tax has been paid. Many people receive a refund if too much tax was withheld from their paychecks, while others may have to make an additional payment if not enough was paid during the year. Filing a tax return is required for most individuals, especially those whose income exceeds a certain threshold, but even those with lower incomes may benefit from filing voluntarily in order to claim refundable tax credits such as the Earned Income Tax Credit or the Child Tax Credit.

Employees usually have income tax automatically withheld from their salary by their employer throughout the year. However, since not all individual circumstances can be considered in advance, the annual tax return is the way to adjust for any differences. This means that overpaid taxes can be refunded, or underpayments can be settled.

Whether a tax return must be filed depends on several factors, including income level, filing status and age. Filing status categories in the US include single, married filing jointly, married filing separately, head of household and qualifying widow or widower. These categories affect the standard deduction and tax rates applied. People who are self-employed, have multiple sources of income or have sold investments are also generally required to file a return.

Many expenses and payments can be deducted or credited to reduce the overall tax burden. These include certain job-related costs, student loan interest, charitable donations, medical expenses, contributions to retirement accounts and education-related costs. Unlike in some other countries, the US tax system offers a wide range of tax credits and deductions that can significantly influence the final amount owed or refunded.

To make the process easier and to avoid mistakes, many taxpayers use tax preparation software or consult a tax advisor. The regular deadline for submitting the federal tax return is April 15 of the following year. Those who need more time can apply for an extension, which moves the filing deadline to October 15, although any taxes owed are still due in April. Filing a tax return carefully and on time can be financially beneficial, as many people receive a refund each year.

My Daily Life and Expenses

As a graphic designer, my days are filled with creativity and tight deadlines. I've been trying to list my expenses, but I'm unsure which of them are tax-deductible.

Firstly, there are my daily commuting costs to work, which quickly add up. I often drive my car, spending about $180 per month on gas. Additionally, parking fees in the city amount to around $60 a month. On rainy days, I opt for the train instead—a monthly pass costs $85.

Working from home occasionally, I've invested in a new adjustable desk for $400 and an ergonomic chair for $250. This has really helped alleviate my back pain. Then there are smaller expenses like printer paper ($10 per month) and ink cartridges ($30 every two months).

Besides work, I invest in my health. My gym membership costs me $50 per month, and I recently bought new sports gear for $120 to enhance my workouts. Staying fit is essential, given the long hours I spend in front of a screen.

Then there are everyday expenses for groceries and household items. I spend an average of $350 per month on fresh and healthy products. Occasionally, I treat myself to lunch at a restaurant near my office, which costs about $12 per meal. Sometimes these lunches double as business meetings, making me wonder if I can claim some of these expenses on my taxes.

Once a year, I take a break. This summer, I spent a week in the mountains, renting a cozy cabin for $800. Additionally, I spent $250 on food and $150 on activities like hiking and wellness—a pricey but worthwhile vacation.

Finally, there are fixed monthly costs like my phone bill ($40) and internet fees for my apartment ($50). Without a reliable connection, productive work, both at the office and home, would be nearly impossible.

Now, I need to include all these expenses in my tax return. It's not easy keeping track and figuring out which costs might be deductible and which aren't.

How to Deduct Certain Expenses on Your Tax Return

As you already know, many expenses can be deducted or credited to reduce your overall tax burden when filing your tax return in the United States. It's crucial to understand which costs are deductible and to what extent, as not all expenses will be fully recognized for tax purposes. Let's delve into some of the key deductible expenses and the relevant limits and percentages.

One of the primary categories of deductible expenses is business-related costs, known as "work-related expenses." For instance, commuting costs can be claimed using the standard mileage rate, which is 56 cents per mile for 2021. This means if you drive 20 miles to work every day, you can claim $11.20 per workday. Work-related equipment like desks, chairs, or printer supplies are deductible as well. Purchases up to $2,500 can be deducted in full immediately, while more expensive items must be depreciated over time.

The significance of home office expenses has grown, particularly with the rise of remote work. If you don't have a dedicated office room, you may be eligible for the home office deduction, which allows you to claim $5 per square foot of your workspace, up to a maximum of 300 square feet. However, if you have a dedicated home office, you can deduct the full costs of the space—such as rent or utilities—proportionately, provided it is used exclusively for work purposes.

Beyond work-related expenses, there are "special deductions" which include donations, student loan interest, or education-related costs. Donations can be deducted up to 60% of your adjusted gross income if made in cash, while student loan interest is deductible up to $2,500 annually. Costs related to education, like tuition and fees, may also be deductible under specific conditions.

"Medical expenses" are another category that can be deducted if they exceed 7.5% of your adjusted gross income. These include costs for treatments, prescriptions, or even certain health-related equipment. Health investments like gym memberships generally do not qualify unless prescribed by a doctor.

Additionally, "childcare expenses" can be claimed as a credit. Up to 35% of eligible childcare expenses for children under the age of 13 can be credited, subject to a limit of $3,000 for one child and $6,000 for two or more children.

Finally, "miscellaneous deductions" include costs like phone bills and internet fees necessary for work. These are deductible if they exceed 2% of your adjusted gross income and are directly related to your employment.

These deductions offer a glimpse into the many tax advantages available. Depending on your unique situation, there might be additional deductions applicable to you, such as retirement contributions or moving expenses. Tax laws can be intricate and frequently change, so it's advisable to seek personalized advice to maximize your tax benefits.