“Jesus said to them, “Render to Caesar the things that are Caesar’s, and to God the things that are God’s.” And they marveled at him.” – Mark 12:17 ESV
As we mentioned in the last episode, there are thousands upon thousands of pages of tax codes and regulations! How will one know what credits and deductions are allowable during their tax preparation? The answer to that may lie in a conversation and tax review with a professional tax preparer. For many of us we know a good handful of deductions and credits that we include in our tax preparation. But, there are some that are touted as the most commonly missed deductions and credits of today.
So let’s dig in and examine some of the most overlooked tax deductions and credits.
Tax Credits vs Tax Deductions
Deductions – Reducing taxable income on which the tax rate is charged.
Credits – An amount credited towards a tax liability. Credits are better than deductions.
A deduction can only lower your taxable income and the tax rate that is used to calculate your tax. This can result in a larger refund of your withholding. A credit reduces your tax giving you a larger refund of your withholding, but certain tax credits can give you a refund even if you have no withholding (H&R Block).
Examples of Commonly Overlooked Tax Deductions
- Charitable Contributions – The charitable contributions deduction reduces taxable income by allowing individual taxpayers and businesses to deduct contributions of cash and property to qualified charitable organizations (Investopedia).
- Student Loan Interest Paid – The student loan interest deduction allows borrowers to deduct up to $2,500 of the interest paid on a loan for higher education directly on Form 1040.
- Moving Expenses (for work purposes) – You can deduct your unreimbursed moving expenses for you, your spouse, and your dependents.
- Social Security Taxes you pay when self-employed
- Deductions of Medicare Premiums for the Self-Employed – If you’re self-employed and receive Medicare, you may be able to deduct all your Medicare insurance premiums. The IRS has recently ruled that Medicare recipients who have self-employment income may deduct the premiums they pay for Medicare coverage, the same as the premiums for any other type of health insurance (Nolo).
- Home office deductions – The home office deduction allows qualified taxpayers to deduct certain home expenses when they file taxes. To claim the home office deduction on their 2022 tax return, taxpayers generally must exclusively and regularly use part of their home or a separate structure on their property as their primary place of business (IRS).
- Medical and dental expenses (only for the portion of expenses that exceed 7.5% of your AGI) – If you itemize your deductions for a taxable year on Schedule A (Form 1040), Itemized Deductions, you may be able to deduct expenses you paid that year for medical and dental care for yourself, your spouse, and your dependents. You may deduct only the amount of your total medical expenses that exceed 7.5% of your adjusted gross income.
- Job search expenses – Deductible job search expenses include qualified travel expenses for interviewing (mileage, food, hotel, etc.), unreimbursed job agency placement fees, and even resume preparation and postage.
Examples of Commonly Overlooked Tax Credits
- Child & Dependent Care Tax Credit – This tax credit helps offset the costs of raising kids and is worth up to $2,000 for each qualifying child. To get a Child Tax Credit refund, you must earn more than $2,500. Raising children is expensive—recent reports show that the cost of raising a child is over $200,000 throughout the child’s lifetime (TaxOutreach).
- Earned Income Tax Credit (EITC) – The earned income tax credit (EITC) is a refundable tax credit that helps certain U.S. taxpayers with low earnings by reducing the amount of tax owed on a dollar-for-dollar basis. Taxpayers may be eligible for refunds if their tax credit exceeds their tax liability for the year.
- American opportunity credit – The American Opportunity Tax Credit is a tax credit to help pay for education expenses paid for the first four years of education completed after high school. You can get a maximum annual credit of $2,500 per eligible student and 40% or $1,000 could be refunded if you owe no tax.
- Lifetime learning credit – The Lifetime Learning Credit (LLC) is a tax credit used to offset the cost of tuition and related expenses. It can help eligible students pay for undergraduate, graduate and professional degree courses and courses taken to get or improve job skills. There is no limit on the number of years you can claim the credit.
The US tax code has baked into it various tax credits and deductions for those that qualify. With a seasoned and knowledgeable tax preparer, you should be able to take advantage of some of the many credits and deductions so that your tax liability would be reduced. Part of the process of claiming these deductions and credits would be for you to do one or both of these things:
- Do your due diligence. A little bit of work to understand the various credits and deductions now could save a lot in taxes.
- Schedule an off-season meeting with your tax preparer for them to review your last few years of returns and ask you questions to see if you may qualify for any other credits or deductions…
Please know that come January most good tax preparers are very busy though April/May of that year, if not longer into the year. Be respectful of their time and schedule an off-season meeting to see if there would be some ways to amend your current tax return or make changes this year for next year’s return.
Proverbs 21:5 – The plans of the diligent lead to profit as surely as haste leads to poverty.
Consider being one that plans and plans in a diligent manner so that you can maximize your credits and deductions in a way that will allow you to provide in a better way for your family and potentially increase your generosity to Kingdom work in your local church!
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