When it comes to taking deductions on your taxes, many of us are confused as to what's actually eligible. On the one hand, claiming deductions you don't qualify for or inflating the amounts can put you in serious hot water with the IRS. But some people are so conservative that they may be overlooking exemptions they're entitled to that can save them some serious cash.
This week, during her On the Money segment, NBC News senior business correspondent Stephanie Ruhle took a deep dive into some of the deductions many people should be taking — and clearing up some misconceptions about work from home deductions that some of us may think we can take after a year of working from home.
"According to Pew Research Center, before the pandemic only one in five Americans say they worked from home all or most of the time," reported Ruhle. "Now, almost three quarters of those workers are working remotely."
But Ruhle warns that most of us can't actually deduct work from home expenses on our taxes, in particular if you work as a W2 employee. Ruhle spoke with millennial tax expert Kesha JonTae' to find out the answers to some of our most common questions when it comes to taking deductions on our taxes.
What are tax deductions?
"Deductions can be either personal or business," explained JonTae'. "You can think of a business deduction simply as things we spend money on to make money or items we spend money on for our business." JonTae' said that for a small business owner, that could be any valid business expense like a home office or computers. Educators may be able to deduct money for things they spent on for their classrooms.
"Personal deductions are things like medical expenses, mortgage interests, student loan interests," she said. "A long time ago, congress decided some interest was deductible. I look at these deductibles as a way the government incentivizes use to do things like buy homes and get educated."
Why is it so important to find eligible deductions?
JonTae's said in simple terms that deductions can reduce the amount of money you owe on your taxes. "Tax deduction reduces the amount of income you pay taxes on," she said. "So let’s say you owe taxes on $50,000 of income. If you have $5,000 of deductions. Instead of you paying tax on $50,000 of income you pay taxes on $45,000 worth of income."
What's the difference between deductions and exemptions?
JonTae' said exemptions are deductions by a different name. "But it’s important to note we now have credits," she said. "There are child tax credits, earned income credit, education credit." In many cases a credit can be even more beneficial than an exemption.d
Are more people eligible for work from home tax deductions this year?
If you were hoping for a deduction because you've worked from your kitchen table (or couch or a desk in your kid's closet) during the pandemic, sadly, this isn't something that you'll likely be able to take.
"If you work as a W2 employee and you simply went to remote working you have no eligibility for work from home reductions," said JonTae'. She noted that with a tax reform that started in 2018 there is no longer a federal deduction from working from home unless you are self-employed or live in one of the few states that still allow you to deduct any taxes.
What can you deduct if you work from home and are eligible for a deduction?
JonTae' said that mortgage interest, property taxes, rent, utilities, repairs and insurance can all be possible deductions. "Deduct cost of furnishing your home office," she suggested. Computers, furniture, desk chairs and some decor may all be deductible.
Should I be saving my receipts?
While it's essential to keep track of your expenses, you don't need to send receipts in with your tax return.
"As a tax preparer, we don't request the documentation," said JonTae'. "I just request the number from you." She does recommend holding onto all receipts and bills and even taking photos of them. "I always tell my clients, the more you have to prove [your deductions] the better," she said.
What are the biggest mistakes people make when it comes to deductions?
"People get tempted to put more than they should and that’s risky because when the IRS is requesting documentation to prove you drove 100,000 business miles and you cannot provide it, then it gets them in trouble," said JonTae'. So make sure what you put on your tax return is accurate -- and that you can back it up. "On the flip side people also get conservative," said JonTae'. "They don't want to deduct things they do qualify for because they don't want the IRS to come after them." So even though it's smart to play by the rules, make sure you're not shortchanging yourself, either.
For more advice on getting through tax season, head to On the Money TODAY with Stephanie Ruhle.