The Most Important Tax Breaks You Need To Know
Managing your tax burden effectively doesn't just mean paying your tax bill blindly every year. The federal government withholds a portion of your paycheck every month and then come April, taxpayers have the opportunity to settle their accounts, with millions receiving money back from the government.
A tax return is the product of overcharging and often comes as a result of deductions and other tax breaks that are factored into the equation but not considered until tax season. The standard deduction, for instance, lops off more than $10,000 (and up to $27,700) from your taxable figure, severely reducing the amount of income that ultimately should be subjected to IRS paws. In addition (or as an alternative, in some cases) to claiming the standard deduction, taxpayers have a wide berth when it comes to adding tax breaks and credits into their income adjustment. While there are certainly some obscure avenues that taxpayers have explored to maximize their return, the truth is that plenty of tax breaks are on the table for regular Americans to use to their advantage. These are the most important tax-reducing options you have at your disposal that you may not already be leveraging.
The Child Tax Credit
The Child Tax Credit is likely the most obvious tax break on this list. It's a great place to start because it's so well known, offers black-and-white qualification criteria, and makes up one of the most widely relied upon tax breaks available to Americans. Whether you are part of a large family or are filing as a single parent, if you have a child under your care you qualify for this tax credit, plain and simple. For every child in your family, you have access to a $2,000 deduction from your taxable income. Moreover, the majority of this credit, $1,600, is refundable and therefore offers parents an opportunity to increase the total dollar amount of their tax refund directly.
Credits for children do not currently include unborn dependents, although Georgia has passed legislation that treats not-yet-born offspring as legal dependents for state tax reporting purposes. Similarly, to claim children on your taxes they must be legitimately dependent on you. Tax credits for children become a little more complicated for divorced parents who share responsibility, but generally speaking, the primary caregiver will be the one eligible to claim a child in this regard.
Student loan interest deduction (and collegiate education tax credits)
Anyone with outstanding student loans can take solace in the fact that this expense can act as a tax buffer. Up to $2,500 can be written off your taxable income figure to offset the interest paid on your loans. Your loan provider will provide the exact figures for your itemized deduction calculations. Therefore, anyone looking to utilize an itemized deduction won't need to work out complicated equations to separate interest payments from the portion going toward the loan's principal.
In addition to the tax benefit for those who have left school, the federal government offers tax reduction opportunities for anyone still pursuing higher education. The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) each offer students the ability to reduce their taxable income. The AOTC allows those pursuing their first four years of collegiate study to write off up to $2,500 in conjunction with qualified tuition expenses, course material, and other education fees, with some limitations. Students must be enrolled at least half-time in a degree-granting program. This can be an Associate's Degree or a Bachelor's program, but students can't have already claimed the credit for more than four years. The Lifetime Learning Credit allows more leeway and can be used indefinitely. This credit provides up to $2,000 in deduction potential. To take advantage of the LLC you must be enrolled in some kind of higher education but there is no degree-granting requirement or mandated minimum commitment level.
The Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) is a tax liability reduction tool designed to help low-income Americans. It's a refundable tax credit that drastically reduces or perhaps even eliminates your tax burden to provide financial relief for those who need it most. The Earned Income Tax Credit ranges from $600 to $7,430, depending on your income level and the number of children you have. EITC claimers must be at least 25 years old (and younger than 65) if applying for the credit without any children and qualified individuals will have at least $1 of earned income as well as investment income that doesn't reach a threshold of $11,000 (in 2023). Additionally, filers hoping to take advantage of the Earned Income Tax Credit must not have any foreign income to report or live outside of the United States.
These requirements mean that many people will qualify for some kind of relief under the EITC framework. For married couples with no children, the threshold is $24,210, resulting in a tax credit of $600. However, for joint filers making less than $63,398 and supporting three or more children, this figure rises substantially to a maximum of $7,430. This tax credit overwhelmingly benefits those supporting children and can be used to drastically change your taxable income and ultimately your refund. Specifically, it provides a jumpstart for families struggling with middle or low-range incomes while trying their best to raise children alongside the rigors of everyday life.
Mortgage interest deduction
In the same way that students can reduce taxable income via interest paid on their student loans, homeowners can take advantage of the same benefit about their mortgage payments. Deducting the interest you've paid on your mortgage can offer a solid boost to your overall taxable income reduction efforts. Just like with student loans, your loan provider will likely send you year-end tax documents automatically so that you can evaluate your potential deduction rate and consider whether to use your mortgage interest payments as a part of an itemized deduction.
This approach may benefit those with longer mortgage terms more effectively. With a lengthy mortgage term, you'll pay more in interest throughout the loan, but can therefore claim a larger deduction as a result when itemizing your reduction opportunities. This is yet another reason why financial advice from people like Dave Ramsey, who suggests opting for the shortest possible mortgage term, may not be sage wisdom after all.
Home office deductions
The value of deducting expenses related to working from home has skyrocketed in recent years. With huge numbers of workers still contributing to their workplace teams from the comfort of their home, a considerable number of deduction possibilities have come into play for many more Americans.
If you plan to apply an itemized deduction on your taxes, an arrangement that sees you working from home can offer a huge boost to your income adjustment. Deducting expenses related to your home office setup requires a dedicated workspace in your property. Anyone who has commandeered a spare bedroom to use as an office will fall into this category, but a worker who sets up their laptop at the kitchen table each morning may have a little more difficulty justifying this one. Once you've established a working space in your home, you can deduct rent or mortgage payments, utility expenses, and a wide range of other spending categories in proportion to the rough percentage of your home that's used as your professional workspace. For those who've worked at home all year, all of these expenses can add up to a serious boost to your itemized deduction, offering a major swing in your favor when it comes to filing your income taxes.
Solar Tax Credit (the Residential Clean Energy Credit)
The Residential Clean Energy Credit provides a deduction of up to 30% of the installation costs for a new solar setup. This includes both solar water heater constructions and the installation of solar panels on your roof for use in powering the home.
This tax credit falls under the ITC umbrella and stands as an incentive for homeowners to invest in new projects that improve their property. The solar tax credit is not refundable, so it doesn't offer a direct rebate for a portion of work undertaken on your home. However, the 30% tax deduction rate will remain in effect up until 2032, meaning that homeowners have an extended window with which they can favorably schedule the installation of a solar system at their home. This means that homeowners can opt to install solar paneling any time over much of the next decade, precisely when it will most favorably reduce their adjusted income level.
It's worth noting that solar paneling is an investment that eventually pays for itself. The sooner you make the change the sooner it will start to create benefits to your cash flow and eventually pay itself off. Similarly, this tax credit creates a multiplicity of incentives. Not only can homeowners write off a large portion of the expense and drastically reduce their tax burden, but with that incentive comes a unique opportunity for the U.S. construction industry to lean heavily into solar energy projects in the residential marketplace.
Contributions to your IRA and other retirement savings
Saving for retirement is a crucial part of routine budgetary math for every American. U.S. workers have a variety of tax-advantaged retirement savings plans available to them, including Roth IRA accounts, 401(k) savings funds, and traditional IRAs. There are plenty of reasons to use one or more tax-advantaged retirement savings accounts, but one added benefit comes in the form of a tax deduction. Money invested in one of these types of accounts can be used on your itemized deduction list.
When it comes to your traditional IRA for instance, you may be eligible for a deduction rising to as much as 50% of the maximum contribution. For married spouses filing jointly, you'll be able to write off 50% of your contribution if you have an adjusted gross income of $43,500 or less. From there, joint filers making less than $47,500 can write off 20% of their contribution, and higher earners bringing home up to $73,000 can take advantage of a 10% deduction. For single filers, these figures are a little lower: $21,750 to qualify for 50%, $23,750 to take advantage of a 20% rate, and up to $36,500 for the 10% deduction.
Qualified business income deductions
Those who are self-employed or run their own small business can take advantage of a major tax break. People who work for themselves will likely have to work through more complicated tax reporting frameworks to manage both business filings and personal taxes. However, people falling into this category can write off up to 20% of their qualified business income when reporting during tax season.
Some complicated qualification rules govern this write-off, however. Firstly, if your total taxable income is below $182,101 as a single filer (or $364,200 for joint filers) you are eligible. However, for anyone with total income levels above this threshold, there are some additional tests that your income and specific work are put through. People who work in a "specified service trade or business" like actors, doctors, lawyers, and others won't qualify. Generally, for anyone working in a small business capacity with complicated entanglements or quite a bit of cash flow moving through their incorporated business, speaking with a professional about tax preparation may be the best approach when considering business income deductions.
Deductions for charitable giving
Anyone who routinely donates to charity will have cause for celebration when it comes time to file their taxes. Charitable giving can be added to your itemized deduction, but some regulations need to be kept in mind when utilizing this feature in your tax filing. Generally speaking, any gift that exceeds $250 will require a written acknowledgment from the eligible charity organization. This document must offer up information on the gift in question, including its general description and its rough value in dollars. Large gifts like cars or rare collectibles must be officially appraised as well since they may easily clear the final threshold for reporting rules that take effect at $5,000.
Donations valued at less than $250 don't require these additional steps but you'll still need to get a receipt from the organization to claim tax relief benefits. Also, when considering donations as a means to reduce your taxable income, it's important to note that charitable giving fits into the itemized deduction approach and isn't a tax credit that can be added on top of your standard deduction. This shouldn't discourage people from donating to charities, but it's worth noting that you may not always find it valuable to report charitable giving when that time of the year rolls around once again.
Deductions related to volunteer work expenses
In the same way that charitable giving can be added to your itemized deduction, so too can volunteer work—which acts as a sort of donation of your time rather than belongings. If you travel to perform volunteer work you can deduct the expenses associated with your trip from your taxable income. This means things like volunteering to build homes with Habitat for Humanity (as an example) or working with relief agencies to support communities affected by a natural disaster.
You can't, however, take a vacation and do a little bit of volunteer work while you're away. The IRS says that you must be "on duty in a genuine and substantial sense throughout the trip. However, if you have only nominal duties, or if for significant parts of the trip you don't have any duties, you can't deduct your travel expenses." This means deductions related to volunteer work only apply to those who are primarily acting in service to others. Even so, it's estimated that nearly one-quarter of all Americans (around 60 million people) volunteered in a formal setting between September 2020 and September 2021. With this in mind, there's a decent chance that you fall into this category and may be able to leverage your service to others for an additional benefit beyond the mission of your volunteer work.
The standard deduction
While it's worth exploring whether an itemized deduction is best, the standard deduction will be the more favorable approach for many filers. The reality is that the standard deduction figure you can subtract from your taxable income has been increasing in recent years and stands at a fairly significant number. The 2017 Tax Cuts and Jobs Act (TCJA) ballooned this rate by quite a bit and it has been increasing every year since. Not only does the standard deduction allow you to skip the potentially lengthy itemization process, with a write-off figure of $13,850 for single filers in 2023, it may very well end up rising above what you could itemize anyway. In addition to single filers, heads of household get a standard deduction of $20,800, and married filers reporting their taxes jointly can write off $27,700.
For people who may not have large write-off opportunities like student loan and mortgage interest, unreimbursed medical expenses, or itemizations associated with working from home, the standard deduction is likely a great way to maximize your tax refund. Many filers will likely approach tax season with a general understanding of whether their itemized deduction will come close to this figure. If you don't think yours will then simply opting for the standard deduction may be your best bet when combined with some of the tax credits that remain available to students, parents, and those finding themselves in a variety of other unique circumstances.