Don't Mess With Taxes

A scenic overlook is always worth a stop when traveling. But when it comes to taxes, you definitely don't want to overlook tax breaks that could save you money. (Photo by Gary Yost on Unsplash)

There are two ways to reduce your tax bill. You can take deductions, which reduce the amount of your money that's taxable. You also can claim tax credits, which cut any tax you owe dollar-for-dollar, and in a few cases get you refund.

The options are not mutually exclusive. But they don't do you any good if you don't claim the ones to which you're entitled.

That's the case every filing season for many taxpayers. They miss both tax deductions and tax credits, and end up paying Uncle Sam more than they should.

This costly oversight is especially prevalent as Tax Day nears and people just want to be done with their taxes. With April 15 on the horizon, don't be one of this filers. Stop. Take a minute. In fact, take six months to finish your tax forms by filing an extension.

That extra time could help prevent you from overpaying the Internal Revenue Service, as you have time to explore these 10 tax breaks that many eligible filers too often overlook.

1. Earned income tax credit (EITC): This tax credit is intended to reduce the amount of tax that low- and moderate-income wage earners owe. But every year, only four out of five eligible taxpayers claim the EITC, according to IRS data.

That's too bad, since those EITC-eligible filers miss out on a valuable tax break. For 2023 returns, the EITC could provide some qualifying families as much as $7,430.

The EITC amount is based on your income and the size of your family. And it's not just for taxpayers with dependent children. Single filers with no kids also qualify.

Yes, the EITC can be a hassle to figure. But it's also a refundable tax credit, meaning if your credit amount is more than you owe in tax, you get the excess EITC back as a refund. That alone is worth a bit of extra effort.

Plus, you don't have to do it alone. If you qualify for the EITC, you also likely are eligible to get help from the IRS-trained volunteers at Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (Tax Counseling for the Elderly), who can help with your EITC claim.

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. The tax code can help here.

The Child and Dependent Care Tax Credit 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. Yes, I know that's less than parents pay for care of their kiddos, but every bit that cuts your tax bill helps.

While the child care credit applies to younger members of your family, also note the tax break's full name. If you have other, older dependents who need looking after so you can work, use the Child and Dependent Care Tax Credit to pay for those costs, too.

3. Credit for older dependents: Those older dependents also might help you qualify for  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 — that's next Monday, April 15 — to establish and put money into a traditional IRA for the 2023 tax year. That's a maximum $6,500 if you're younger than 50, or $7,500 if you're age 50 or older. Note that those are the maximum contribution amounts. If you made less than that, then you can only contribute as much as your total earned income for the year.

5. Spousal IRA option: 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 2023, that's $6,500 per account, or $7,500 for filers age 50 or older. Again, as noted in overlooked tax break #4, your contribution is limited to the total amount 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 a tax credit, that $1,000 can erase that much of any tax you owe.

7. Lifetime learning tax lessons: Many parents of college students, or the young adults themselves if they file their own returns, used to use the tuition and fees tax 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 multi-generational 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 2023, be sure to check out whether you can claim this credit.

8. Student loan interest deduction: Folks with large amounts of student debt have been closely following the Biden Administration's efforts to eliminate those amounts. However, if you're still stuck paying off a higher education loan, make use of some the interest you paid on it at filing time. You can deduct up to $2,500 (or the actual amount, whichever is less) of the interest paid on qualified student loans. This tax break, which doesn't require itemizing since it's an above-the-line deduction, can be claimed for interest paid on a qualified student loan for yourself, a spouse, or a dependent.

9. Teachers' 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 this that helps you get some tax payback for your out-of-pocket classroom expenditures. Full-time kindergarten through grade 12 teachers can deduct up to $300 in out-of-pocket classroom expenses in out-of-pocket classroom expenses without having to itemize since it's another of the two-dozen above-the-line deductions. If spouses are both teachers and filing a joint return, the deduction could be as much as $600.

Young students apparently enjoying their casual reading lesson. (Photo from Unsplash+ in collaboration with Getty Images)

True, the $300 (or $600 for married teachers) is a trifling amount. But again, better you get to pocket this small sum instead of it going to the U.S. Treasury.

10. 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.

For the 2023 tax year, filers age 65 or older and/or legally blind taxpayers get an additional $1,500 standard deduction amount for each qualifying circumstance.

If you use tax software or hire a tax preparer to help you file, they should make sure that if you qualify, you don't overlook any of the potential tax savings in this post. 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.

You also might find these items of interest:

• 6 family-friendly tax credits
• 6 tax credits for lower-to-middle income taxpayers
• 8 reasons to file a tax return even if you don't have to
• Don't make any of these 10 common tax-filing mistakes

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