As tax season approaches, many are hopeful for a tax refund—or at least, a lower tax bill. There is a lot for taxpayers to keep up with, which often leads to them missing out on hefty deductions and credits. There may be some contributions you weren’t aware you could deduct.
As you prepare your personal taxes, be sure to:
Remember to list all of your income: This is another common mistake that can lead to penalties or a higher tax bill later.
Understand the difference between deductions and credits: Credits reduce the amount of tax you owe, and deductions reduce the amount of your taxable income.
So, what are all the possible tax write-offs and credits? Keep reading to learn more about:
Retirement contributions
Health savings account contributions
Several crucial tax credits
9 tax deductions
Timing your deductible expenses
Determining your eligibility for itemized deductions
Are you an employer? Check out our blog post on business taxes and 15 write-off categories to further maximize your tax refund!
Contribute as much as possible to your retirement.
A common mistake people make is not deducting contributions to their retirement accounts from their income. If you have a:
Traditional IRA: Your contributions reduce your taxable income. Plus, if you’re at least 50 years old, the catch-up provision allowing you to contribute more can add to your IRA.
Roth IRA: While you don’t get a deduction, you will qualify for the valuable Saver’s Credit if you meet income guidelines
You have until April 15 to set up an IRA and claim the credit for 2022.
Use a health savings account.
Do you have a health savings account (HSA)? Those contributions can also reduce your taxable income, but you must have a high-deductible health insurance plan or one that exceeds the IRS’s required amounts to qualify. Again, you have until April 15 to open an HSA. The HSA contribution limit for 2022 is:
$3,600 for singles,
$7,200 for families, and
Allows an additional $1,000 contribution for those over 55.
You cannot participate in an HSA if:
You have other “first-dollar” medical coverage (i.e., an insurance policy with no deductible where you assume payment once an insurable event occurs),
You enroll in Medicare, or
Another taxpayer claims you as a dependent on their return.
Know your tax credits.
A tax credit reduces the amount of tax you owe. Ensure you know all credits available to you, including the following important ones.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) helps families with low and moderate income, particularly working families with children. If you have:
No qualifying children: You could claim up to $1,502.
Three or more qualifying children: You could receive a credit of up to $6,728 for 2022, even if you don’t have any tax.
Unfortunately, 20% of eligible taxpayers don’t claim the EITC!
Child and Dependent Care Tax Credit
For 2020, up to $6,000 of qualifying expenses can be used for the Child and Dependent Care Tax Credit (CDCTC). The American Rescue Plan brought several changes to the CDCTC exclusively for the 2021 tax year, including:
The qualifying expense amount increased from $3,000 in 2020 to $8,000 for one qualifying person and from $6,000 in 2020 to $16,000 for two or more qualifying individuals.
The percentage of eligible expenses increased from 35% to 50%.
The beginning of the reduction of the credit increased from $15,000 in 2020 to $125,000 of AGI.
The maximum amount you can contribute to a dependent care flexible spending account and the amount of tax-free employer-provided dependent care benefits has also increased from $5,000 to $10,500.
Note that the Consolidated Appropriations Act (CAA) allows taxpayers to use either 2022 or 2021 income (whichever is higher) to maximize their Additional Child Tax Credit (ACTC) and EITC.
Education Tax Credits
Are you a college student or supporting a child in college? There are tax benefits for you, too.
First, the American Opportunity Tax Credit (AOTC) is available per eligible student each tax year. If you have two dependents who are qualified students, you may claim the AOTC for one student and a different educational tax benefit for the other student. You don’t have to claim the same credit for both dependents. The AOTC amount is equal to:
100% of the first $2,000 of qualified expenses, plus
25% of costs over $2,000.
The maximum annual credit per student is $2,500.
The Lifetime Learning Credit is also available for those who have made tuition and fee payments to a graduate school or other post-secondary school (after high school).
You can claim the credit for any post-secondary classes you take and do not have to be working toward a degree.
You may not qualify if your income is too high, but this also depends on your filing status.
The maximum credit you can claim for is 20% of your eligible costs up to $10,000, or $2,000 per tax return.
Energy-Saving Home Improvements
Certain energy expenses qualify for tax credits. The credit percentage is:
26% for 2020 through 2022
22% for 2023
Eliminated as of 2024
Any portion of your unused credit from 2022 carries over to 2023. This does not apply to the electric vehicle credit, but there is still a $7,500 credit per qualifying vehicle for 2022, subject to manufacturer sales limits. The credit will start to phase out once each manufacturer has sold more than 200,000 qualifying vehicles.
Maximize all possible deductions.
Another common oversight is not accounting for all possible deductions. Avoid this by knowing all tax deductions available to you. Below are nine write-offs that can significantly reduce your taxable income:
Medical expense deduction: If you had a major surgery or endured a serious illness, you can deduct the medical expenses if they were more than 7.5% of your adjusted gross income (e.g., someone with an income of $50,000 can deduct medical costs if they were more than $3,750).
State and local sales tax: Use the IRS calculator to determine how much of your state and local sales taxes you can deduct.
Charitable contributions: Keep track of large and small donations, including cash and items like those donated to a shelter or food pantry.
Student loan interest: Even if you're not the one paying the loan, you are eligible to receive the deduction as long as you are the one obligated to pay. The IRS views it as if you were given the money and used it to pay the student loan.
State income tax paid on last year’s return: If you paid state income tax on last year’s return, you can add it to any other state income tax, up to $10,000, and itemize the deduction.
Certain jury duty fees: If your company paid you while on jury duty and required you to give them your jury duty pay, you can deduct that surrendered amount from your income.
Medical miles: This deduction is part of the overall adjusted gross income annual threshold for medical expenses and allows you to deduct 20 cents per mile in 2021 and 2022.
Charity miles: Any travel for charitable purposes is fully deductible at 14 cents per mile for 2021 and 2022.
Self-employment and home office deductions: Self-employed individuals and employers can deduct office equipment, software, and other business-related expenses from their taxes. Employers and business owners who use a portion of their home exclusively and regularly OR as their principal place of business can also claim the home office tax deduction.
Time your deductible expenses.
It’s all about timing! There are several expenses or contributions you can make before the end of the year to reduce your taxable income, such as:
January’s mortgage payment: Make your payment before December 31 to add that interest to your mortgage interest deduction.
Health-related costs: Schedule treatments and exams in the last quarter of the year to increase your medical expense deduction potential.
Charitable contributions: Make them before the end of the year, but ensure it’s a qualified charity and keep records of your donations.
Self-employment costs: What purchases can you make before the end of the year? Consider office equipment and software. If you claim the home office deduction, you can even deduct the cost of painting your home office.
Determine if you can itemize deductions.
The Tax Cuts and Jobs Act (TCJA) significantly increased limits on who can itemize, making it more difficult for individuals to meet the threshold. The limits are now $12,200 for singles or $24,400 for married couples filing jointly. To calculate if you can itemize your deductions, start by adding up those which will likely give you the largest deduction, including:
Mortgage interest deduction
Charitable deduction
State and local income taxes (includes property tax and state income tax, capped at $10,000)
If the total is not close to the itemized deduction requirement, you’ll probably need to take the standard deduction amount.
If you can itemize your deductions, keep track of qualifying medical expenses, charitable contributions, and other deductible items throughout the year in a spreadsheet. This will ensure efficiency at tax time and maximize your tax benefits.
Do you have specific questions about boosting your tax refund? Contact us today at 603-541-7485 or schedule a free consultation. Our experienced accountants will be happy to guide you through the tax credits, deductions, and other benefits available to you.