📝 Tax benefits are generally broken into two major categories: tax deductions and tax credits. As you examine programs that could potentially apply to you, it’s a good idea to know the differences in how tax savings can work.
In short, a credit gives you a dollar-for-dollar reduction in the amount of tax you owe. A tax deduction, also sometimes called a tax write-off, provides a smaller benefit by allowing you to deduct a certain amount from your taxable income.
🛑 Another consideration with tax deductions is that they won’t do you much good unless you itemize your deductions, which only makes sense for people with a considerable amount of deductible expenses.
✅ Most popular tax breaks for the 2024 Tax Filing Season:
🔹 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. In 2023 (taxes filed in 2024), the child tax credit could get you up to $2,000 per child, with $1,600 of the credit being potentially refundable.
🔹 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.
🔹 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.
🔹 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.
🔹 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.
🔹 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 2023 (taxes filed in 2024), the credit maxes out at $15,950. The credit is phased out at MAGI of $279,230 or more.
🔹 Earned Income Tax Credit
This Earned Income Tax Credit (EITC) is a refundable tax break for low-income taxpayers with and without children. For 2023 (taxes filed in 2024), the credit ranges from $600 to $7,430, depending on how many kids you have, your marital status and how much you made.
🔹 Charitable Donation Deduction
If you itemize, you may be able to write off the value of your charitable gifts — whether they’re in cash or property, such as clothes or a car — from your taxable income. Per the IRS, you can generally deduct up to 60% of your adjusted gross income.
🔹 Medical Expenses Deduction
In general, you can write off qualified, unreimbursed medical expenses that are more than 7.5% of your adjusted gross income for the tax year.
🔹 Deduction for State and Local Taxes
You may deduct up to $10,000 ($5,000 if married filing separately) for a combination of property taxes and either state and local income taxes or sales taxes.
🔹 Mortgage Interest Deduction
The Mortgage Interest Tax Deduction is touted as a way to make homeownership more affordable. It cuts the federal income tax that qualifying homeowners pay by reducing their taxable income by the amount of mortgage interest they pay.
🔹 Gambling Loss Deduction
Gambling losses and expenses are deductible only to the extent of gambling winnings. So, spending $100 on lottery tickets isn’t deductible — unless you win, and report, at least $100, too. You can’t write off more than the amount you win.
🔹 IRA Contributions Deduction
You may be able to deduct contributions to a Traditional IRA, though how much you can deduct depends on whether you or your spouse is covered by a retirement plan at work and how much you make.
🔹 401(k) Contributions Deduction
The IRS doesn’t tax what you divert directly from your paycheck into a traditional 401(k). In 2023, the contribution limit was $22,500 ($30,000 if 50 or older). In 2024, that limit rises to $23,000 ($30,500 for those 50 and above). These retirement accounts are usually sponsored by employers, although self-employed people can open their own 401(k)s.
🔹 Saver’s Credit
The saver’s credit runs 10% to 50% of up to $2,000 ($4,000 if filing jointly) in contributions to an IRA, 401(k), 403(b) or certain other retirement plans. The percentage depends on your filing status and income.
🔹 Health Savings Account Contributions Deduction
Contributions to HSAs are tax-deductible, and the withdrawals are tax-free, too, as long as you use them for qualified medical expenses.
🔹 Self-employment Expenses Deduction
There are many valuable tax write-offs for freelancers, contractors and other self-employed people.
🔹 Home Office Deduction
If you use part of your home regularly and exclusively for business-related activity, the IRS lets you write off certain self-employment deductions for associated rent, utilities, real estate taxes, repairs, maintenance and other related expenses.
🔹 Educator Expenses Deduction
If you’re a school teacher or other eligible educator, you can deduct up to $300 spent on classroom supplies. Spouses who are both educators and file jointly get a deduction of $300 each, making them eligible to claim up to $600 on their return.
🔹 Solar Tax Credit
The solar tax credit, also known as the “Residential Clean Energy Credit,” can get you up to 30% of the installation cost of solar energy systems, including solar water heaters and solar panels.
🔹 Electric Vehicle Tax Credit
The nonrefundable EV tax credit ranges from $3,750 to $7,500 for tax year 2023. Taxpayers can also get a credit of up to $4,000 for used cars. Eligibility depends on a number of rules, including income, price of the vehicle and whether the car meets IRS manufacturing guidelines for qualified EVs.
You may also like: Did You Know Donations Offer Tax Advantages?
🛑 How do you claim tax deductions?
Generally, there are two ways to claim tax deductions: Take the standard deduction or itemize deductions ⛔ You can’t do both.
The standard deduction is a flat-dollar, no-questions-asked reduction in your adjusted gross income. The amount you qualify for depends on your filing status. People 65 or older, or who are blind, get a bigger standard deduction.
Itemized deductions let you cut your taxable income by taking any of the hundreds of available tax deductions you qualify for. The more you can deduct, the less you’ll pay in taxes. The standard deduction has gone up significantly in recent years, so you might find that it’s the better option for you now even if you’ve itemized in the past.
📕 Need help getting ready or want help getting off to a great start this 2024?
📍 At Wave Tax we can give you advice on everything related to you and your company’s taxes. Contact us at info@wavetax.us