Tax Prep 2023: Credit Where Credit is Due
With the banking crisis simmering down (for now), it’s time to focus on a topic over which you have some control: taxes! As the April 18th deadline approaches, start the process by answering two questions:
Will You Take the Standard Deduction or Itemize? The standard deduction is a set amount that increases based on inflation. The other option is to itemize, which is when you tally up certain deductions including state and local income or sales taxes (limited to $10,000), real estate and personal property taxes, home mortgage interest, personal casualty and theft losses from a federally declared disaster, gifts to a qualified charity, and unreimbursed medical and dental expenses that exceed 7.5 percent of adjusted gross income. If your total deductions are greater than the standard deduction amount, you will be among the nearly 10 percent of taxpayers who will itemize.
Have You Claimed All of the Credits That You Are Due? So many bemoan the loss or limitations to deductions, but tax credits are more valuable, because they are dollar-for-dollar reductions of the income tax owed, which is why you should claim as many as you can. Here are some of the biggies, which could add big dollars to your bottom line:
Earned Income Tax Credit (EITC). The EITC is aimed at workers with low to moderate income ($59,187 or less) when they file their tax return. The IRS notes that “many people risk missing out on the credit because they don't know they’re eligible, especially people who had a major life change and may qualify for the first time this year.” Check IRS.gov to determine if you qualify and for how much, which is determined by the size of your family. The maximum amount is $7,430 with three or more qualifying children.
Child Tax Credit (CTC): Reverts to the pre-pandemic level of a maximum of $2,000 per qualifying child under the age of 17 and is partially refundable (up to $1,500). The income threshold at which the child tax credit phases out increased to $200,000 ($400,000 married filing jointly (MFJ)).
Child and Dependent Care Credit: Sounds similar, but this is different from the CTC. This nonrefundable credit allows you to claim from 20 - 30 percent of expenses up to a maximum of $3,000 for one qualifying person ($6,000 for two or more) to offset expenses associated with care for dependents (children under the age of 13, a dependent spouse or dependent adults that you claim on your tax return) and it is subject to Adjusted Gross Income (AGI) phase outs, check IRS.gov to determine if you qualify.
Credit for Other Dependents: If you don't qualify for CTC, you may be able to claim this credit, which maxes out at $500 for each dependent who meets certain conditions, including: dependents under the age of 18, other dependent parents or relatives that you support and even dependents living with you, who aren't related to you. This credit phases out at $200,000 ($400,000 MFJ), check IRS.gov to determine eligibility.
Adoption Credit: The adoption tax credit allows families who were in the adoption process during 2022 to claim up to $14,890 in eligible adoption expenses for each eligible child. Taxpayers can apply the credit to international, domestic, private and public foster care adoptions. For tax year 2022, the Modified Adjusted Gross Income (MAGI) phaseout begins at $223,410 and ends at $263,410.
American Opportunity Tax Credit: For qualified education expenses paid for an eligible student for the first four years of higher education. The amount of the credit is 100 percent of the first $2,000 of qualified education expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student. To claim it, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 for MFJ). Reduced amounts available for incomes of $80,001 - $90,000 ($160,001 - $180,000 MFJ).
Savers Tax Credit: This credit can offset part of the first $2,000 workers contribute to IRAs and workplace retirement plans (401(k)s, 403(b)s, 457 plans) and is available for singles with incomes up to $34,000 in 2022 (MFJ up to $68,000).
Solar Investment Tax Credit (ITC): This credit helps offset the initial cost of a solar photovoltaic (PV) system by allowing you to claim 30 percent of the total cost of your solar installation on your federal taxes. The system must be installed during the tax year and generate electricity for a home located in the United States. There is no maximum amount that can be claimed.
Qualified Plug-In Electric Drive Motor Vehicle Credit: If you bought a new, qualified plug-in electric vehicle (EV) in 2022 or before, you may be eligible for a clean vehicle tax credit up to $7,500. The credit is nonrefundable, so you can't get back more on the credit than you owe in taxes and you can't apply any excess credit to future tax years.