Tax benefits typically fall into two primary categories: tax deductions and tax credits. When evaluating programs that may be applicable to your situation, it’s essential to understand the distinctions in how these tax-saving mechanisms operate.
In brief, a tax credit provides a direct, dollar-for-dollar reduction in the total amount of tax you owe. Conversely, a tax deduction, often referred to as a “tax write-off,” offers a more modest advantage by permitting you to subtract a specific amount from your taxable income.
It’s worth noting that tax deductions may not be particularly beneficial unless you opt to itemize your deductions, a strategy typically favored by individuals with substantial deductible expenses.
Below, you’ll find information on 20 commonly used tax breaks, an explanation of how tax deductions function, as well as links to additional resources that can deepen your understanding of the topic.
1. Child tax credit
The child tax credit, or CTC, is a tax break for families with children below the age of 17. To qualify, you have to meet certain income requirements as well.
If you’ve not yet filed for the 2022 tax year (taxes due in 2023), the credit could get you up to $2,000 per child, with $1,500 of the credit being potentially refundable.
In 2023 (taxes filed in 2024), the CTC remains at a maximum of $2,000 per child, but the partially refundable portion, known as the additional child tax credit, rises to $1,600.
2. Child and dependent care credit
The child and dependent care credit, or CDCC, is meant to cover a percentage of day care and similar costs for a child under 13, a spouse or parent unable to care for themselves, or another dependent so you can work. Generally, it’s up to 35% of $3,000 of expenses for one dependent or $6,000 for two or more dependents.
3. American opportunity tax credit
The American opportunity tax credit, sometimes shortened to AOC, lets you claim all of the first $2,000 you spent on tuition, books, equipment and school fees — but not living expenses or transportation — plus 25% of the next $2,000, for a total of $2,500.
4. Lifetime learning credit
The lifetime learning credit lets you claim 20% of the first $10,000 you paid toward tuition and fees, for a maximum of $2,000. Like the American opportunity tax credit, the lifetime learning credit doesn’t count living expenses or transportation as eligible expenses. You can claim books or supplies needed for coursework.
5. Student loan interest deduction
The student loan interest deduction lets borrowers write off up to $2,500 from their taxable income if they paid interest on their student loans.
6. Adoption credit
The adoption credit is a nonrefundable tax break that helps taxpayers cover a certain amount of qualified adoption costs per child. The credit begins to incrementally decrease at certain income levels and completely phases once your modified adjusted gross income (MAGI) exceeds the given threshold for that tax year.
For the 2022 tax year (taxes that were due in 2023), the credit maxes out at $14,890, and the credit phases out once MAGI exceeds $263,410.
For 2023 (taxes filed in 2024), the credit ceiling rises to $15,950, and the modified adjusted gross income phase-out threshold is $279,230.
FAQ: How do I claim the Child Tax Credit for a baby born in 2023?
You cannot claim a baby born in 2023 yet; you’ll have to wait until 2024. When you file taxes, you can only include information for that tax year. Even though you are filing your 2022 taxes in 2023, you can only include income, children, marriages, etc. that occurred in 2022.
When you file taxes next year, you can claim children that were born in 2023.
Parents should consider talking to a tax advisor for several reasons:
- Complex Tax Laws: Tax laws can be complex, and they change frequently. Parents may have various deductions, credits, and exemptions available to them that they are unaware of. A tax advisor can help them navigate these complexities and ensure they take advantage of all available benefits.
- Family-Specific Deductions: Parents may be eligible for tax deductions and credits related to their children’s education, childcare expenses, adoption, or other family-related expenses. A tax advisor can identify these opportunities and help parents maximize their tax benefits.
- Investment and Retirement Planning: Parents often have multiple financial goals, including saving for their children’s education and planning for retirement. A tax advisor can provide guidance on tax-efficient investment strategies and retirement planning, helping parents save money in the long term.
- Changing Circumstances: Family situations can change, with births, adoptions, marriages, divorces, or other life events. Each of these events can have tax implications, and a tax advisor can help parents understand and manage these changes effectively.
- Audit Support: In the event of an IRS audit or tax-related dispute, having a tax advisor can be invaluable. They can represent parents and ensure compliance with tax regulations during the audit process.
As for the frequency of mistakes when filing taxes, it can vary widely depending on individual circumstances, knowledge, and the complexity of their financial situation. Common mistakes parents may make when filing taxes include:
- Incorrect Filing Status: Choosing the wrong filing status, such as filing as single instead of married, can lead to errors in tax calculations.
- Missing Deductions and Credits: Parents may overlook deductions and credits they are eligible for, resulting in overpayment of taxes.
- Math Errors: Simple arithmetic mistakes can lead to incorrect tax calculations.
- Failure to Report Income: Parents may forget to report all sources of income, such as freelance work or side gigs.
- Not Keeping Records: Inadequate record-keeping can make it difficult to substantiate deductions and credits claimed on the tax return.
- Late or Missed Filings: Missing the tax filing deadline or filing late can result in penalties and interest.
- Not Updating Tax Withholding: Parents may not adjust their tax withholding to reflect changes in their financial situation, leading to underpayment or overpayment of taxes.
The potential savings from consulting a tax advisor can also vary widely. It depends on factors such as income level, family size, financial situation, and the complexity of their taxes. A tax advisor can help parents identify opportunities to legally reduce their tax liability, potentially saving them hundreds or even thousands of dollars each year. However, the exact amount saved will vary from one family to another. To get a precise estimate, parents should consult with a tax professional like us who can assess their specific circumstances. (206) 838-3800 — email@example.com