Don't miss these 10 often overlooked tax breaks
Tuesday, March 21, 2023
The Tax Cuts and Jobs Act's expansion of the standard deduction amounts means even more taxpayers are using that filing method. Most think that since they don't itemize, they don't need to worry about tax breaks.
They're wrong.
There are the above-the-line deductions, officially known as adjustments to income, that anyone can take (if they qualify), regardless of whether they take the standard deduction or use Schedule A.
Then there are some tax credits, again available regardless of which deduction method you use, that too often slip through the filing cracks. Credits are even better than deductions (or adjustments) because they directly reduce dollar-for-dollar what you owe Uncle Sam. In a few cases, credits could even get you a tax refund.
If you've yet to file, as we get closer to the 2023 Tax Day — that's April 18, just in case you forgot — it's normal to feel a bit rushed. But don't let your filing haste, especially if you push it to the last minute, produce tax break waste.
Check out these 10 commonly overlooked tax credits and deductions. They could save you some tax dollars
1. Earned income tax credit (EITC): This credit is intended to reduce the amount of tax owed for low- and moderate-income wage earners. However, says the Internal Revenue Service, every year only four out of five eligible taxpayers claim the EITC.
That's too bad, since that quarter of EITC-eligible filers who don't claim it miss a valuable tax break. Yes, it's not as helpful on 2022 taxes for single filers, since the COVID-prompted changes expired. But it's still dollars for you, instead of Uncle Sam.
Basically, the credit amount depends on your income and the size of your family. For 2022 taxes, a single filer without kids could get a maximum EITC of $560. The largest EITC possible is $6,935 for families with three or more qualifying children. You can read more about the latest tax credit changes and how to claim it in my "Don't miss out on EITC, but note the 2022 tax return changes" post from earlier this year.
2. Dependent care costs: Ask any parent about the cost of raising a family and they'll tell your that one of the biggest expenses is paying for someone to watch after their youngsters while mom and dad (or mom and mom or dad and dad or all the single parents) are at work. As more workers have returned to offices as the coronavirus pandemic eased, child care is once again a challenge, and an expense.
This tax break also was enhanced during the height of the pandemic, and those changes, like for the EITC, are back to their pre-COVID levels. But, as I note in an earlier post, the child care tax credit is still worth a look. It could provide a credit of up to $1,050 for the expenses to care for one child, or up to $2,100 in costs to care for two or more youngsters.
3. Credit for older dependents: You probably noticed in the child care credit discussion just above that it actually has a longer official name. It can be claimed for care of other, older dependents, too. Again, that's covered in my prior post.
If you do take care of others who aren't your minor children, you also want to check into the Credit for Other Dependents. It's a $500 tax credit that can help cut your taxes if you are providing for older kids and/or aging parents or older relatives who are part of your household.
4. Deductible IRA contributions: Traditional IRAs are still popular for many people for a variety of reasons. One them is that contributions, in full or part, to these retirement vehicles might be deductible. This twofer — getting an immediate tax break while saving for your post-work years — also is a tax break that still available for the prior tax year.
You have until Tax Day, again April 18, to establish and put money into a traditional IRA for the 2022 tax year. That's a maximum $6,000 if you're younger than 50, or $7,000 if you're age 50 or older.
5. Contribute to a spousal IRA: Relationships take many forms, and while there are a lot of couples where both spouses work, sometimes they rely on one income. In these cases, a couple where one spouse doesn't work might be able to achieve some tax savings through a spousal IRA.
The officially titled Kay Bailey Hutchison Spousal IRA, named after the former U.S. Senator from Texas who championed the plan, allows the couple to use the income-earning spouse's amount to calculate eligibility and contribution limits for the spouse who didn't get any paychecks.
Contributions can be made to the spousal IRA up to the current limits, which are the same as other IRAs. Again, for 2022, that's $6,000 per account, or $7,000 for filers age 50 or older. Or, as with all IRAs, up to the total the working spouse earned if it's less than the maximum contribution level.
If your marital and work situation applies here, check out the Kay Bailey Hutchison Spousal IRA in IRS Publication 590-A.
6. Retirement savings credit: If you do put some money into an IRA, traditional or Roth version, or a workplace or self-employment retirement plan, you also might be able to get a bonus tax break. The Saver's Credit is available to lower- and middle-income earners who contribute to retirement savings. It's worth up to $1,000. And because it's such a great tax advantage, I've got to point out its name: Saver's Credit. That means the $1,000 it provides can erase $1,000 of tax you owe.
7. Lifetime learning lessons: Many parents of college students, or the young adults themselves if they file their own returns, used to use the tuition and fees above-the-line deduction. That tax break, however, has been replaced by a better one. You guessed it. It's now a tax credit.
Specifically, the Lifetime Learning Credit now can be used in connection with many of the former tuition and fees expenses. It's worth a potential maximum of $2,000 per return.
Best of all, this tax break lives up to its lifetime appellation. The Lifetime Learning Credit covers lessons for students of all ages, including those of us in the working work who are taking some continuing ed classes to improve our on-the-job skills. If you took such classes in 2022, be sure to check out whether you can claim this credit.
8. Teacher classroom expenses: If you're on the other side of the educational spectrum and dispense knowledge to eager students, you're probably well aware of the above-the-line deduction that helps you get some tax payback for your out-of-pocket classroom expenditures. Thanks to inflation adjustments, full-time kindergarten through grade 12 teachers can deduct up to $300 in out-of-pocket classroom expenses in out-of-pocket classroom expenses as an above-the-line deduction. If spouses are both teachers and filing a joint return, the deduction can be as much as $600.
True, that's a trifling $50 ($100 for married teachers) increase from where this tax break was stuck for too many years. But again, better you get this small amount instead of the U.S. Treasury.
9. Larger standard deductions for older filers: The standard deduction that most of now claim when we file our taxes is based on filing status. But a couple of other factors can come into play here.
Older, as well as visually impaired taxpayers of any age, generally can claim additional standard deduction amounts just by checking boxes on Form 1040 or Form 1040-SR, which was created especially for senior citizen taxpayers.
10. Charity-related costs: If it's more tax worthwhile to claim your charitable gifts as itemized expenses, make sure you don't miss out on any charity-related miles. You can count that travel distance at 14 cents per mile among your charitable gifts on Schedule A. Also be sure to include the amounts for receipts for parking and tolls. These miles could add up, for example, if you used your car to help your local community assistance group deliver prepared meals for the homebound.
Volunteering with your favorite nonprofit also can be fulfilling for you and, if you keep good records, help out at tax time.
No, you cannot claim the value of your volunteer hours. But you can deduct the value of any in-kind donations you make as a volunteer. This includes things such as the office supplies you bought when you spent the day helping organize the organization's administrative and operational systems.
If you use tax software or hire a tax preparer to help you file, they should catch these listed here if you qualify. But it never hurts to know what to look for and discuss with your tax pro.
And the possible tax savings could be enough to cover the price you paid for the filing help.
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