Tax deductions and credits can help make filing your taxes in 2023 easier and cheaper, two descriptions not normally associated with income taxes.

You have to know which programs apply to you and must itemize your deductions instead of taking the standard deduction. For most people, itemizing deductions only makes sense if they have enough deductible expenses that add up to more than the savings of a standard deduction.

Tax deductions vs tax credits

First, it helps to know the differences between tax deductions and credits.

Tax deductions

Tax deductions allow a certain amount to be deducted from your taxable income, and can reduce the amount of your income before you calculate the tax you owe. The amount of the tax deduction is subtracted from your income, which lowers your taxable income, and thus your tax bill is lower.

Deductions lower your taxable income by the percentage of your highest federal income tax bracket. If you fall into the 22% tax bracket, a $1,000 deduction saves you $220.

Tax credits

Tax credits reduce the amount of tax you owe on a dollar-for-dollar basis, and can reduce the amount of tax you owe or increase your tax refund. Some credits may give you a refund even if you don’t owe any tax.

A $1,000 tax credit lowers your tax bill by $1,000. Tax credits are usually bigger than tax deductions, and can lower your tax bill by a lot more.

Some credits are refundable, meaning you get a check for the amount, depending on how much you owe in taxes. If you qualify for a $1,000 credit but owe $250 in taxes, you’ll get a refund for the difference of $750. Many credits, however, aren’t refundable.

Popular deductions and credits

The Internal Revenue Service lists many tax deductions and credits that can save taxpayers money. Here are some of the most popular ones:

Child tax credit

The child tax credit provides up to $2,000 per child, with $1,500 potentially refundable. The IRS has an online tool to determine if a persona qualifies for the credit.

Child and dependent care credit

This credit generally covers up to 35% of day care and related costs for a child under 13, a spouse or parent unable to care for themselves, or another dependent so you can work. Expenses are limited to $3,000 for one dependent or $6,000 for two or more.

Earned income tax credit

Called the EITC for short, this tax credit is meant for low-to-moderate-income workers and families. For filers with an adjusted gross income of around $59,000 or less, the EITC provides a tax credit between $560 and $6,935.

Adoption credit

Up to $14,890 in adoption costs per child can be used as a tax credit. An income limit is imposed, up to $263,410 of your modified adjusted gross income for tax year 2022.

American opportunity tax credit

The AOC is an education credit on the first $2,000 spent on tuition, books, equipment and school fees, plus 25% of the next $2,000, for a total of $2,500. Living expenses and transportation costs can’t be claimed.

Lifetime learning credit

This is among the many education tax benefits allowed by the IRS. It allows up to $2,000 paid for tuition and school fees to be used as a tax credit.

Student loan interest deduction

Up to $2,500 can be deducted from taxes on interest paid on student loans.

Charitable donations deduction

Donations you make to charities can be deducted if you itemize. These include cash or property, such as clothes, a car and furniture. You can generally deduct up to 60% of your adjusted gross income. 

Mortgage interest deduction

The mortgage interest tax deduction can be a big savings for homeowners. The mortgage interest they pay is deducted from their taxable income, which lowers their federal income tax.

Saver’s credit

From 10%-50% of up to $2,000, or $4,000 if filing jointly, in contributions to an IRA, 401(k), 403(b) or certain other retirement plans can be taken as a tax credit. The amount of credit you receive is based on the contributions and your adjusted gross income. The lower your income, the higher saver’s credit rate you’ll get.

401(k) contributions deduction

Money moved from your paycheck into a 401(k) retirement plan is not taxed by the IRS. The contribution limit for the 2022 tax year was $20,500, or $27,000 if you were 50 or older.

Electric vehicle tax credit

The electric vehicle tax credit is not refundable, but it can mean deducting from $2,500 to $7,000 from the taxes you owe when buying an electric car. For tax year 2023, the credit expands to used electric vehicles, so consider it when filing your 2023 taxes in 2024.

Solar tax credit

Also called the residential clean energy credit, the solar tax credit gives up to 30% of the installation cost of solar energy systems such as solar water heaters and solar panels.

Health Savings Account contributions deduction

HSA contributions are tax-deductible, and withdrawals for qualified medical expenses are tax-free.

Medical expenses deduction

Qualified, unreimbursed medical and dental expenses that are up to 7.5% of your adjusted gross income can be deducted from your taxes.

Gambling loss deduction

Gambling losses and expenses are tax deductions up to the amount you’ve won gambling. Spend $100 on lottery tickets or bet that much at a casino, then you can report a $100 deduction if you win at least $100. You can’t deduct more than you win.

How much is the standard deduction?

Tax deductions are either itemized or a standard deduction, not both. Itemizing takes some extra work, but is worth it if it’s higher than the standard deduction. 

How much your standard deduction is depends on your filing status. Here are some of the standard deduction amounts for 2022:

• Married for jointly or qualifying widow(er): $25,900
• Head of household: $19,400
• Single or married filing separately: $12,950

Taxpayers who are 65 and older or blind also get an increase in their standard deduction. It’s $1,750 more for single or head of household, and $1,400 more for married or qualifying widow(er).

If you liked Tax deductions 101, you may also like:

• What if you cannot pay your taxes for 2022?
• What to do if you get a tax refund in 2023
• Tax season 2023 checklist

Disclaimer: This guide to buying a house and getting a mortgage is for informational purposes only and is not intended as a substitute for professional advice.

The post Tax deductions 101: Common deductions and credits that can save you money appeared first on Credit Sesame.

As if you’re not already busy enough, tax season is in full bloom. It’s time to gather your tax documents and file your tax return. You may not have to file one, however, if you have a low income matching your filing status requirements.

Even if you don’t legally need to file a return, you may want to file one anyway to get a refund owed to you.

If federal income tax was withheld from your paychecks or you want to claim a refundable tax credit, then there’s a good chance you may be entitled to a refund, especially if you fall below certain income thresholds set by the Internal Revenue Service. 

For returns filed in 2022, about $345 billion was issued in refunds, with the average refund at $3,175. And who wants to leave $3,175 on the table? If you don’t file a tax return when you’re owed a refund, then you won’t get the refund.

Before you decide to file, you should at least consider some of the basic criteria for filing a tax return.

Minimum income levels

The minimum income required to file a 2022 federal tax return depends on your filing status and age as of the end of 2022. If you fall below the threshold, you generally don’t need to file a return.

Here are the minimum incomes needed to file taxes:

Single filing status

• $12,950 if under age 65
• $14,700 if 65 or older

Married filing jointly

• $25,900 if both spouses under 65
• $27,300 if one spouse under 65 and one 65 or older
• $28,700 if both spouses 65 or older

Married filing separately

• $12,950 for all ages

Head of household

• $19,400 if under age 65
• $21,150 if 65 or older

Qualifying widow(er) with dependent child

• $25,900 if under 65
• $27,300 if 65 or older

Not a U.S. citizen

Income and tax filing status are two big factors in knowing if you’re required to file a tax return. For people who live in the U.S. and earn money but aren’t a citizen, they may also need to file a return by using form 1040NR, the U.S. nonresident alien income tax return form.

People who are not U.S. citizens are called nonresident aliens by the IRS. They need an individual taxpayer identification number, ITIN, Social Security number, or SSN. Some countries have income tax treaties with the United States where residents of foreign countries are taxed at a reduced rate or exempt from U.S. taxes on certain types of income in the U.S.

Earned income tax credit

Just like you need to file a return to get a refund of withheld income taxes, you must also file taxes to get a refund of the earned income tax credit, or EITC. You may be eligible for this refund even if you don’t owe taxes.

Depending on your income and how many children you have, lower-income workers may get an EITC of $510 to $6,318. Even if you don’t have children, you may still be eligible for this refundable credit. The IRS has a free online tool to see if you qualify.

Basically, the income requirements to qualify for EITC are:

• Earned income under $59,187
• Investment income below $10,300

You’re self-employed

If your income is less than your standard deduction, then you generally don’t need to file a tax return. However, certain types of income require filing a return for other reasons, such as self-employed income.

Self-employed people must generally file an annual return and pay estimated tax quarterly if their net earnings were $400 or more. If they earned less than $400, they must still file an income tax return if they meet other filing requirements that are in a 113-page document the IRS provides.

Self-employed workers must figure their net profit or loss from their business by subtracting business expenses from business income.

If expenses are less than income, the difference is net profit and can be taxed. If expenses are more than income, then the difference is a net loss and can usually be deducted from gross income.

When Social Security benefits are taxed

Social Security benefits aren’t taxable income, and a tax return doesn’t usually have to be filed by people who receive these benefits. However, there are exceptions. Among them:

• Some benefits are taxable income if you’re married but file a separate tax return from your spouse who you lived with during the year.
• Tax-exempt income such as tax-exempt interest is received.

When a dependent may need to file a tax return

A child or adult who is claimed as a dependent on someone’s tax return must file a return when their earned income is more than their standard deduction.

In 2022, the standard deduction for single dependents who are under age 65 and not blind is the greater of:

• $1,150
• Or more than $400 in the person’s earned income, up to the deduction for an unclaimed single taxpayer of $12,950

Free online tool for help

If you’re unsure if you should file a tax return, the IRS has a free online tool to decide if your filing status and income require if you need to file.

The form takes about 12 minutes to complete and require you knowing:

• Your filing status
• Federal income tax withheld
• Basic information to help you determine your gross income

If you enjoyed Do You Need to File a Tax Return, you may be interested in:

• How to Find a Good Tax Preparer
• 10 Ways to Improve Your Family Finances in 2023
• Will There Be a Recession in 2023?

Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

The post Do you need to file a tax return? appeared first on Credit Sesame.