When filing your personal tax return, taking advantage of eligible deductions and credits can make a big difference in reducing your tax bill or boosting your refund. From education credits to retirement deductions, these tax breaks are designed to lighten the load for taxpayers. Here’s a look at some key deductions and credits you don’t want to miss.
- Standard Deduction vs. Itemized Deductions
Every taxpayer has the option to take the standard deduction or to itemize. For the 2023 tax year, the standard deduction is:
- $13,850 for single filers,
- $27,700 for married couples filing jointly, and
- $20,800 for heads of household.
Itemizing may be beneficial if your total deductions (such as mortgage interest, property taxes, and charitable contributions) exceed the standard deduction. While itemizing can be more time-intensive, it may significantly reduce your taxable income in some cases.
- Charitable Contributions
If you’ve donated to a qualified charity, you may be eligible to deduct your contributions. For taxpayers who itemize, cash donations can be deducted up to 60% of your adjusted gross income (AGI). Non-cash donations, such as clothing or household items, are also deductible based on their fair market value.
Tip: Be sure to obtain receipts for all donations, as the IRS may require proof of your contributions.
- Mortgage Interest Deduction
Homeowners can often deduct mortgage interest paid on loans up to $750,000 for a primary or secondary residence. This deduction is especially valuable for new homeowners or those with high-interest mortgages.
Tip: Remember that you must itemize deductions to claim mortgage interest, so weigh the benefit against the standard deduction.
- Student Loan Interest Deduction
If you’re paying off student loans, you may be eligible for a deduction of up to $2,500 on interest paid during the year. The deduction applies whether you itemize or not, and it can reduce your taxable income even if you don’t have many other deductions.
Tip: Eligibility is phased out at higher income levels, so check IRS income thresholds to see if you qualify.
- Education Credits: American Opportunity Credit & Lifetime Learning Credit
The American Opportunity Tax Credit (AOTC) offers up to $2,500 per student for qualified education expenses in the first four years of college. The Lifetime Learning Credit (LLC) provides up to $2,000 for tuition and fees at any point in your education.
Tip: You can only claim one of these credits per student each year, so review your options to determine which will benefit you most.
- Earned Income Tax Credit (EITC)
The Earned Income Tax Credit is designed to benefit low- to moderate-income earners, and it can offer substantial savings. The EITC is refundable, which means you could receive a refund even if you don’t owe taxes. The amount varies based on your income and family size, with larger credits available to those with dependents.
Tip: Income limits and credit amounts change annually, so be sure to check IRS guidelines to confirm eligibility.
- Child Tax Credit
The Child Tax Credit allows parents to claim up to $2,000 per qualifying child under 17. This credit is partially refundable, meaning it can reduce your tax liability below zero, resulting in a refund. For children over 17 or other dependents, a smaller $500 credit may be available.
Tip: Ensure that each child you claim qualifies as a dependent according to IRS guidelines, including meeting residency and relationship requirements.
- Retirement Contributions: IRA and 401(k) Deductions
Contributing to a Traditional IRA can yield a deduction up to $6,500 (or $7,500 if you’re 50 or older) on your tax return, subject to income limitations. Contributions to 401(k) plans can also reduce your taxable income, up to $22,500 for those under 50, or $30,000 for those 50 and older.
Tip: Contributions made up until the tax deadline (typically April 15) for IRAs still count toward the prior tax year, giving you time to boost your deduction.
- Medical and Dental Expenses
If your unreimbursed medical and dental expenses exceed 7.5% of your adjusted gross income, you can claim a deduction for the amount over this threshold. Eligible expenses include doctor visits, surgeries, prescription medications, and even certain medical-related transportation costs.
Tip: This deduction requires itemizing, so weigh the total of your eligible medical expenses against the standard deduction.
- State and Local Taxes (SALT) Deduction
For those who itemize, the State and Local Tax (SALT) Deduction allows you to deduct up to $10,000 in combined state and local property taxes, and either income or sales taxes. This deduction benefits taxpayers in states with high property taxes or state income taxes.
Tip: Be aware of the $10,000 cap, which applies regardless of filing status.
- Saver’s Credit
Designed to encourage retirement savings, the Saver’s Credit offers a tax credit worth up to $1,000 (or $2,000 for married couples filing jointly) for contributions to retirement accounts like IRAs and 401(k)s. This credit is income-based, with eligibility limited to lower-income earners.
Tip: The Saver’s Credit can be claimed on top of retirement contribution deductions, maximizing tax savings.
- Energy-Efficient Home Improvements
The IRS offers credits for certain energy-efficient home improvements, such as solar panels, energy-efficient windows, and other eligible energy-saving upgrades. The Residential Energy Efficient Property Credit can be a valuable incentive for homeowners making eco-friendly updates.
Tip: These credits often phase out over several years, so check current IRS rules to determine which improvements are eligible.
Final Thoughts
Understanding these key deductions and credits can help you significantly reduce your tax burden. While some tax breaks, like the standard deduction, apply broadly, others require planning or specific eligibility criteria. If navigating these deductions and credits feels complex, consulting with a tax professional can help ensure you don’t miss out on any valuable savings. Taking advantage of these opportunities can make a real difference in your financial health during tax season and beyond.
