Americans have historically treated the Internal Revenue Service like they do a root canal or driving on the expressway during Friday rush hour – they’d prefer to avoid it.
Take a recent study from WalletHub that states 38% of Americans would agree to wear an IRS tattoo if it meant they could go tax-free for the rest of their lives. Another 20% say they’d take a lifetime vow of celibacy for the same treatment.
The thing is, life would go easier for tax-weary Americans if they better understood how they could keep more of their own money and see less of it go to Uncle Sam.
Take IRS tax credits, which many Americans apparently don’t. While there’s actually an abundance of solid tax breaks in the IRS tax code, taxpayers avoid them, either because they’re unaware of the discounts or because they believe tax breaks are for the billionaire crowd, and not for Main Street Americans.
Nothing could be further from the truth.
“Most Americans don’t take tax breaks coming to them every year as they are unaware of them,” said CoinLedger director of tax strategy Miles Brooks. “As tax law changes, it’s challenging to keep up with the recent deductions, exemptions, and credits. Yet eligible taxpayers fail to capitalize on tax breaks every year, leading to higher tax bills.”
The Best Tax Breaks for This Year’s Return Period
What tax breaks should Americans aim for this year? While every situation is unique, these tax credits should be high on the list.
Savings plan contributions. Even though 2022 has ended, there are still some steps you can take to reduce your income tax liability for Tax Year 2022.
“IRA contributions (and some self-employed retirement plan contributions) are due April 15, 2022 for Tax Year 2023,” said Wealth Enhancement Group financial advisor Michelle Guissinger. “Health Savings Account contributions are due April 15, 2022 for Tax Year 2023.”
Make sure you’re deducting the higher of your standard deduction or the total of your itemized deductions.
“With the higher standard deduction amounts ($12,950 per person in most cases), a significant portion of taxpayers will take the standard deduction and don’t need to compile personal deductions such as medical expenses and charitable contributions,” Guissinger noted.
Home energy improvements. Another good tax break is energy-efficient renovations on a principal residence.
“Certain improvements that meet IRS specifications can generate a 30% credit of the total cost,” said Blue Chip Partners senior financial advisor Jonathan Johnson. “In this case, if a necessary expense is needed, it may be worth the research and spending a bit more to have Uncle Sam cover almost one-third of the cost.”
Child and dependent care expenses. Taxpayers who work or are looking for work may be able to deduct work-related costs, such as for a babysitter, daycare, aftercare programs, or summer or sports camp for qualifying dependents.
“In addition to these deductions for qualifying children under age 13, many people don’t realize they may also qualify for the child and dependent care expenses for their spouse or another dependent person who isn’t physically or mentally able to care for themselves if they lived with them for more than half the year and meet certain tests,” said Prager Metis partner Robbin E. Caruso.
For 2022, the maximum benefit for this nonrefundable tax credit “is up to $3,000 for one qualifying person or up to $6,000 for two or more qualifying persons, where the maximum credit allowed is up to 35% of employment-related expenses incurred,” Caruso noted.
The child tax credit. The child tax credit for 2022 is $2,000 for each qualifying child under age 17, if the modified adjusted gross income is $400,000 or lower for those married filing jointly ($200,000 or lower for other filing statuses).
“The 2022 credit has been reduced in line with pre-COVID enhancements and this will result in lower refunds for many families,” Caruso said.
Education Tax Credits. Two tax credits are available to taxpayers who incurred education expenses during 2022.
“The American Opportunity Tax Credit can offset up to $2,500 of tax costs if qualified tuition and related expenses were paid during the year,” said Adelphi University Willumstad School of Business professor Karen Wallace. “Eligibility criteria include the student’s course load (must be at least half-time), the expenses must be paid for the first four years of secondary education, and the taxpayer’s adjusted gross income. If allowable, up to 40% of the AOTC is refundable."
The Lifetime Learning Credit provides a credit of up to $2,000 per year for qualified education expenses.
“The credit is allowed for an unlimited number of years and expenses can include postsecondary academic coursework or courses to obtain or improve job skills,” Wallace noted.
Should You Go It Alone on Tax Breaks?
It always helps to work with a trusted accountant or tax specialist when compiling your tax returns.
That said, in some cases, you can go it alone on taxes.
“A standard W2 employee with no outside business income can save the cost of hiring a professional preparer and do their own,” Johnson said. “However, someone with expenses throughout the year they normally don’t have may want to seek professional advice.”
Seeking professional help in a non-typical year may incur some tax preparation expenses, but could be worth it.”
“You may see a net positive cash flow for the year if the preparer is able to generate deductions or credits the individual would not have produced on their own,” Johnson added.
