By May 20, 2022, over 145 million taxpayers had dutifully filed their federal income tax returns. And they all made decisions about deductions and credits – whether or not they realized it.
When you take the time to learn more about specific tax concepts, you may be able to put the tax code to work for you. A good place to start is with credits and deductions.
As tax credits are usually subtracted, dollar for dollar, from your actual tax liability, they potentially have greater leverage in reducing your tax burden than deductions. Tax credits typically have phase-out limits, so please consult a legal or tax professional for specific information regarding your individual situation.
Here are a few tax credits that you may be eligible for:
The Child Tax Credit is a federal tax credit for families with dependent children under age 17. The maximum credit is $2,000 per qualifying child, depending on your income level.
The American Opportunity Credit provides a tax credit of up to $2,500 per eligible student for tuition costs for four years of post-high-school education.
Those who have to pay someone to care for a child (under 13) or other dependent may be able to claim a tax credit for those qualifying expenses. The Child and Dependent Care Credit provides up to $4,000 for one qualifying individual or up to $8,000 for two or more qualifying individuals.
Deductions are subtracted from your income before your taxes are calculated, and thus, may reduce the amount of money on which you are taxed, and by extension, your eventual tax liability. Like tax credits, deductions typically have phase-out limits, so consider consulting a legal or tax professional for specific information regarding your individual situation.
Here are a few examples of deductions.
Under certain limitations, contributions made to qualifying charitable organizations are deductible. In addition to cash contributions, you can potentially deduct the fair market value of any property you donate. And you may be able to write off out-of-pocket costs incurred while doing work for a charity.
If certain qualifications are met that were updated in the 2017 Tax Cuts and Jobs Act, you may be able to deduct the mortgage interest you pay on a loan secured for your primary or secondary residence.6
Amounts set aside for retirement through a qualified retirement plan, such as an Individual Retirement Account, may be deducted. The 2023 contribution limit is $6,500, and if you are age 50 or older, the limit is $7,500.
If you itemize your tax deductions, the state and local tax deduction allows you to deduct up to $10,000 of your state and local property taxes, as well as your state income or sales taxes.
You may be able to deduct the amount of your medical and dental expenses that exceed 7.5% percent of your adjusted gross income.
Standard Deduction or Itemize?
The IRS has a handy guide to help you understand the difference between itemizing or taking the standard deduction. You should also consult your tax professional for his or her suggestions on this matter.
If you do not itemize deductions, you are entitled to take the standard deduction on your taxes. For 2023 that amount is $13,850 for single individuals and $27,700 for those who are married and filing jointly.
Understanding credits and deductions is a critical building block to making the tax code work for you. But remember, the information in this article is not intended as tax or legal advice. And it may not be used for the purpose of avoiding any federal tax penalties.
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About the Author
Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.
Peak Wealth Planning provides concierge services to meet your wealth management needs. Services include: financial planning, investment management, esop diversification, retirement income, insurance, and estate planning advice. Peak Wealth Planning is a fee-based financial advisor based in Champaign, Illinois, and Fraser, Colorado.