These Tax Credits and Deductions Can Increase Your Tax Return — A Lot
There are many different types of deductions and credits to know about.
Tax deductions and credits can help lower the amount you pay to the IRS. Deductions offset your taxable income. Their dollar value depends on your tax bracket — the higher your bracket, the more valuable the deduction. You can only use most of them if you choose to itemize your tax return. Since the standard deduction is now more than double what it was three years ago, many Americans are opting not to itemize their deductions anymore.
Tax credits, on the other hand, give you dollar-for-dollar tax savings and are available to everyone who qualifies, regardless of how you file. Here are some common deductions and credits to consider when you’re next preparing your taxes.
- Self-Employment Expenses. If you work for yourself, you can deduct many of the costs necessary to run your business. Those costs include everything from your internet and marketing materials to travel, meals, and even insurance premiums and contributions to individual retirement plans. A home office is also a source of potential deductions; you can deduct a percentage of utilities, property taxes, and homeowners insurance equal to the percentage of your home that you use solely for your business.
- Moving Expenses. It used to be that everyone could deduct qualified expenses related to relocating for work. Now, only active duty members of the armed forces who move because of a military order to change station may deduct qualified costs. Those costs include rental trucks, storage units, tolls, and even airline tickets.
- Retirement Contributions. Contributions to an individual retirement account (IRA) can reduce your taxable income for the year. The amount of your deduction depends on your income level, and whether you participate in a workplace retirement plan such as a 401(k). (Contributions to a Roth IRA do not qualify for a deduction, as they are made with after-tax dollars.)
- Capital Losses. If you lost money on investments during the year, those losses can be used to offset some of your taxable income — provided that your capital losses exceed your capital gains for the year. You can apply up to $3,000 if you’re married filing jointly (or $1,500 if you’re married filing separately) of those excess losses to offset your ordinary income, with any additional losses available to be carried over to subsequent years.
- Student Loan Interest. Taxpayers can deduct up to $2,500 in interest paid on qualified student loans in 2022. The deduction is income-dependent and the amount you’re allowed to deduct is reduced or phased out completely when your income reaches the cap for your filing status.
- Contributions to Health Savings Accounts. If you’re enrolled in an eligible high-deductible health plan and make contributions to a health savings account (HSA), you can deduct up to $3,650 ($7,300 for family coverage) in 2022. If you’re 55 years old or older, you can contribute — and therefore deduct — an additional $1,000.
- Contributions to Charity. Donations to eligible, IRS-approved nonprofit organizations qualify as deductions. Eligible donations include cash, investments, or art, and even household goods donated to charitable organizations.
- Interest on Homeownership Debt. The interest you pay on a loan secured by your home, such as a mortgage or home equity line of credit, is a deductible expense — with limits. If your mortgage debt totals more than $750,000 (or $1 million if your loan was taken out before December 16, 2017), you can deduct only a portion of the interest payments you make on it. The same applies for home equity debt used to buy, build, or make significant improvements to your home, up to the limit of $750,000.
- Earned Income Tax Credit. This tax credit is aimed at helping low-to moderate-income workers counter the costs of Social Security taxes. Eligibility for the credit, and the actual value of the credit, depends on taxpayer income, filing status, and the number of dependents. In 2022, the size of the credit ranges from $560 for a qualifying taxpayer without children to $6,935 for someone with three or more kids.
- Child Tax Credit. In 2022, the child tax credit is worth up to $2,000 per child. In order to take this credit, your child must be under age 16. The credit is only refundable up to $1,500 depending on household or individual income. The credit phases out for high-income taxpayers.
- Child and Dependent Care Credit. You may qualify if you paid a qualified provider to look after a child under 13 years of age, or a disabled dependent of any age, while you worked or looked for work. Depending on your gross annual income, you can claim a credit of up to $4,000 worth of qualifying expenses for the care of one individual, or $8,000 worth for two or more individuals. It’s potentially refundable, which means that you may still receive this benefit even if you don’t owe taxes.
- Premium Tax Credit. If your household income is between 100 percent and 400 percent of the federal poverty level for the size of your family, the premium tax credit can help you cover the cost of insurance purchased through the Health Insurance Marketplace.
- American Opportunity Tax Credit. Students enrolled at least part-time in a college or post-secondary program can receive up to a $2,500 credit to offset school costs. The credit can be claimed by the student or someone who claims them as a dependent. It covers tuition and fees, including books and supplies, but it can’t be used to defray housing costs, transportation, or insurance. It can be claimed for the first four years of post-secondary education.
- The Lifetime Learning Credit. This credit is worth up to $2,000 per tax return for the costs of tuition and education expenses for students enrolled in eligible undergraduate, graduate, and professional degree courses — including courses to acquire or improve job skills.
Don’t Miss These Deductions and Credits
Even though the standard deduction is higher than ever, itemizing may still make sense if you can claim a lot of deductions. If you decide to itemize, don’t forget to include these commonly overlooked credits and write-offs.
- Out-of-Pocket Charitable Expenses. Cash gifts aren’t the only charitable contributions you can claim on your return. Small, out-of-pocket costs are also deductible, from the ingredients you used to make a meal for your local soup kitchen to mileage you rack up taking members of your kids’ Boys and Girls Club on a trip. While you can’t write off the cost of any services you’ve volunteered over the course of the year, you can deduct associated expenses, such as uniforms and transportation.
- State Taxes. Income taxes you’ve paid to your state and/or municipality of up to $10,000 are deductible on your federal return. Eligible deductions include any withholding amounts listed on your W-2 or 1099 forms, estimated tax payments, and required payments to state benefit funds. If your state doesn’t have an income tax, or you’ve made several large purchases throughout the year, you can deduct state and local sales taxes instead.
- Earned Income Tax Credit. One in five people entitled to the EITC neglect to claim it, possibly because they don’t identify as someone who meets the lower-to moderate-income requirements. If you took a significant pay cut, saw a dramatic reduction in hours worked, or were laid off this year, take a look to see if you qualify.
- Retirement Saving Contributions Credit (the Savers Credit). Lower-to moderate-income workers can deduct a percentage of the money they’ve saved for retirement in an IRA or employer-sponsored plan. Depending on your AGI and filing status, you could receive a credit worth between 10 percent and 50 percent of the first $2,000 contributed to those accounts.
- Mortgage Points. In addition to writing off interest paid on your mortgage, you may also be able to deduct the points paid to the lender to secure a home loan — including refinancing and lines of credit. Points paid on a mortgage are typically fully deductible in the year you purchased your home. However, if your mortgage exceeds $750,000 for a home purchased after December 15, 2017 (or $1 million on loans taken out on or before that date), or you’ve borrowed more than $100,000 against your home, you can’t deduct all your points or all the interest on your mortgage.
A version of this article appeared in our partner magazine, The Essential Tax Guide: 2023 Edition.
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