It's tax time and that time of year when millions of taxpayers prepare to send in their returns. Navigating one of the most complex tax systems in the world is no easy task. As taxpayers do so, they are looking to mitigate the tax burden on them and their families.
One of the ways to do that is through tax deductions and tax credits. But first, we must understand the differences. A tax credit reduces your tax dollar for dollar. Meaning a $2,000 tax credit will save you $2,000 in your pocket. Whereas a $2,000 tax deduction would save you roughly $500 to $700 dollars in your pocket.
Conceptually, tax credits are more valuable than deductions. Here are ten of the most commonly overlooked tax credits on individual returns.
1. Retirement savings credit: This credit is for taxpayers who make retirement plan contributions but whose income threshold is low. Your gross income for married taxpayers filing jointly must be below $73k. Your credit can equal up to 50% of your retirement contributions if you qualify.
2. Child and dependent care credit: This credit is for taxpayers who pay for childcare for children under age 13 and whose parents are working. Even day camps during the summer qualify for this credit, so be sure to keep track of costs.
3. Adoption expenses: Expenses incurred in adopting a child are up to $15,950.
4. Lifetime learning credit: We often think about credits for college for children, but adults going back to school could qualify for one as well for post-secondary education and courses to acquire or improve job skills. The income limitation for this one is at $180k for married filing joint taxpayers.
5. Energy-efficient home improvements: Homeowners who install energy-saving improvements such as insulation, heat pumps, windows, or even for a home energy audit, can qualify for up to $3,200 per year.
6. Residential clean energy: This credit is different from energy-efficient home improvements in that it is designed for the installation of things like solar electricity, small wind energy, geothermal heat, and so on. This credit can equal up to 30% of the cost.
7. Credit for other dependents: This credit is allowed for dependents in the household who are not your children. It could be a parent, grandparent, etc. The credit amount is $500 per dependent.
8. Credit for elderly or disabled: Low-income taxpayers age 65 or older or permanently disabled can qualify. The maximum credit allowed is up to $6,604.
9. Foreign tax credit: If you have investments, chances are you may have paid some foreign tax within your portfolio. Be sure to pick up this credit.
10. Clean vehicle credit: Taxpayers who purchase a plug-in electric vehicle can qualify for up to $7,500 in tax credits. There are phaseouts depending on your vehicle, so check with your dealer first.
The United States tax code is incredibly complex. The credits listed above are just a sampling of options available to taxpayers. Some of these credits are permanent, and some are temporary. Stay tuned with political developments, as the tax code is the ultimate political football and is constantly changing. You can expect significant changes in 2025/2026 for two reasons: one, we have a presidential election this year, and two, many of the tax code changes from 2017 are set to expire at the end of 2025. This will force Congress to act one way or another by either pushing change or letting them expire. Either way, it's going to affect taxpayers.
Best of luck as you finish another filing season!
For more expert tax advice and preparation, accounting services or estate planning visit rollerisheppardcpas.com
Navigating one of the most complex tax systems in the world is no easy task.