On The Mission To Preserving Your Income: Ways To Optimize Tax Savings

Although the official 2022 Tax Season has concluded, it is crucial to highlight various tax breaks that many people may have overlooked this year. Understanding different tax deductions and credits becomes increasingly important as we approach the tax filing extension deadline on October 15th. This article aims to familiarize you with a broad spectrum of tax credits and deductions, offering foundational knowledge to help you prepare for upcoming tax years. Please note that the specifics discussed in this article are subject to change for the 2023 tax year and beyond; however, many of these tax advantages are expected to endure, with potential modifications over time.

Tax Jargon Explained

Before we embark on this journey of tax savings, let's unravel some essential terms:

Tax Deductions:  These lower your taxable income. For example, if you earn $80,000 and have $10,000 in deductions, your taxable income drops to $70,000.

Tax Credits: These directly decrease your income tax liability. Suppose you owe $20,000 in federal income tax; a $2,000 tax credit would reduce your obligation to $18,000, yielding a $2,000 saving.

Non-refundable Tax Credits: These can minimize your tax liability, potentially reducing it to zero but not below.

Refundable Tax Credits: These credits can zero out your tax liability and lead to a tax refund if the credits exceed the amount you owe.

Adjusted Gross Income (AGI): This is your total income minus specific deductions, such as educator expenses, student loan interest, alimony payments, or contributions to retirement accounts.

Although not a specific term, it's important to understand that your tax benefits can vary significantly based on your income, filing status, and family size.

Exploring Tax Credits and Deductions

Child Tax Credit

Parents with children under 17 who correctly claim their child as a dependent on their tax return may be eligible for a total Child Tax Credit of $2,000, of which $1,600 is refundable.

Earned Income Tax Credit

Tailored for low- to moderate-income families, the amount of this tax credit varies based on family size and income. Families with lower incomes and more children are eligible for the maximum benefits. In comparison, those with fewer children and higher incomes receive reduced benefits. The total credit amount for the 2023 tax year can range from $600 to $7,430.

Child and Dependent Care Credit

The credit aims to ease the financial strain on working-class families with children and dependents. This non-refundable tax credit permits taxpayers who are currently employed or actively job-seeking to claim up to $3,000 for one qualifying dependent and $6,000 for two or more relating to the expenses for their care.

Adoption Credit

For individuals considering adoption, the IRS offers a non-refundable tax credit of $15,950 for children with special needs and up to the same amount for other adoptees in the 2023 tax year. As with many tax credits, the benefits decrease for those with higher incomes. Specifically, this credit starts to phase out for taxpayers whose adjusted gross income exceeds $239,230. It is eliminated when the AGI surpasses $279,230.

Student Loan Interest Deduction

If you have attended college, chances are you are either repaying student loans or have done so in the past. For those actively repaying these loans, knowing that you can deduct up to a specific limit of your student loan interest is valuable. For the 2023 tax year, taxpayers can deduct up to $2,500 of student loan interest from their income.

American Opportunity Credit

This credit allows students to claim up to $2,500 of certain adjusted education expenses for 2022 tax returns. Up to 40% of this credit may be refundable. Still, it is generally only available to students in their first four years of postsecondary education.

Lifetime Learning Credit

Similar to the American Opportunity Credit, the Lifetime Learning Credit offers up to $2,000 in tax credits for eligible education expenses. Unlike its counterpart, this credit is non-refundable but applies to all years of postsecondary education, including courses that enhance job skills.

Mortgage Interest Deduction

Homeowners can benefit from this deduction, which allows them to write off a portion of the interest paid on their mortgage, thus making homeownership more financially manageable. 

Charitable Contributions Deduction

It truly pays to be charitable. You can deduct the fair market value of donations made to qualified charitable organizations from your taxable income. Fun Fact: If you meet specific criteria, you can even deduct the fair market value of items donated to certain nonprofits like Goodwill and the Salvation Army.

Moving Expenses

Members of the U.S. Armed Forces can deduct certain moving expenses from their taxable income, such as the cost of traveling and shipping household goods to a new address.

Capital Loss Deduction

If you sell a capital asset, such as a home, personal-use item, share of stock, etc., at a loss, you can deduct that loss from your taxable income.

Retirement Savings Contributions Credit (Saver's Credit)

Taxpayers who make contributions to an employer retirement plan, Individual Retirement Acounts (IRA), or Achieving a Better Life Experience account (ABLE) may be eligible to reduce the amount they owe in taxes through this credit. Those with lower incomes who are married and file jointly benefit the most from this credit; however, you can still benefit if you file your taxes as head of household, single, married filing separately, or qualified surviving spouse. The amount of money provided by this credit ranges between 10% and 50% of your contributions and is influenced by your income and filing status.

Energy Efficient Home Improvement Credit

For specific energy-efficient improvements made on a home of residence (both for owners and renters) between 2023 and 2032, taxpayers can receive a non-refundable tax credit of 30% of their total improvement expenses, maxing out at either $1,200 or $2,000 depending on the specific improvements. A few improvements that qualify under this credit include installing windows, water heaters, central air conditioners, and more.

Residential Clean Energy Credit

This non-refundable credit works similarly to the "Energy Efficient Home Improvement Credit," except it applies to a different set of home improvements. Between the years 2022 and 2032, 30% of the total costs placed on the taxpayer when installing a qualified improvement, such as solar, wind, or geothermal power generation, solar water heaters, fuel cells, etc., can be used as part of their Residential Clean Energy Credit.

Credits for New Clean Vehicles Purchased in 2023

Those looking to purchase a new plug-in EV or fuel cell electric vehicle for themselves or their businesses can save up to $7,500 in taxes they owe on qualified vehicles. While this non-refundable credit is available to many households across the United States, there is a modified adjusted gross income cap on this credit. To qualify for this credit, married couples filing jointly must make under $300,000, heads of households must make under $225,000, and all other filers must make under $150,000.

Deduction for Business Use of Home

Taxpayers who are self-employed or a partner may be eligible to deduct expenses for the part of their home they use for work. There are several eligible uses; some include utilizing a part of your home as a primary place of business, renting it out, using it as a daycare facility, and more.

Deduction for Business Use of Car

Taxpayers may deduct the full cost of owning and operating their car if it is used specifically for business purposes, but they can only deduct a portion of their car's expenses if they use it for both business and personal purposes.

For a comprehensive list of eligibility requirements and further details on these tax breaks, visit the IRS website. Carefully reviewing these requirements is imperative if you intend to utilize any of these deductions or credits, as consequences can accompany claiming a tax credit or deduction for which you are not eligible. Your financial landscape can significantly benefit from these tax breaks, ensuring you preserve your hard-earned income. Stay informed and make the most of these opportunities in your tax planning endeavors.

Disclaimer: The information provided in this article is for informational purposes only and does not constitute financial or tax advice. Please consult a qualified tax professional for personalized advice based on your individual situation and the latest tax laws and regulations.