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If you didn’t get the raise last year that you thought you deserved, there may still be a way to put more of your hard-earned money back in your pocket — by claiming all of the tax deductions and credits for which you are eligible.
Tax breaks make it easier to cover the cost of everything from childcare to retirement to higher education, but only if you take full advantage.
“It’s easy to overlook some of the most valuable tax credits and deductions,” said DeDe Jones, a financial professional and accountant with Innovative Financial in Lakewood, Colorado. “When you start digging around, a lot of times you’ll find missed opportunities.”
Understand credits vs. deductions
Tax credits and deductions are different animals, though both can reduce the amount of tax you owe.
A tax credit provides a dollar-for-dollar reduction of your income tax liability, while a deduction reduces the amount of your income that is subject to taxation. To illustrate, a $1,000 tax credit would save you $1,000, while a $1,000 deduction would lower your taxable income by that amount. For someone in the 25 percent tax bracket, that might mean a tax savings of $250.
“Tax credits are always more valuable than deductions,” said Jones, noting many, but not all, are designed to help lower income individuals.
Some credits are available to taxpayers at all income levels, while others have income restrictions, including the Earned Income Tax Credit and Child Tax Credit.
The IRS notes that, if you qualify, you can claim any credit, regardless of whether you itemize your deductions.
The following five credits and deductions, however, often get left on the table:
1. Saver’s Credit
The Saver’s Credit, which helps low- and moderate- income workers save for their retirement, is easily overlooked, said Jones.
To be eligible in tax year 2022, your adjusted gross income (AGI) must be no more than $34,000 for someone filing as single; ($51,000 if head of household; $68,000 if married filing jointly). For tax year 2023, single filers must have AGI of no more than $36,500, while heads of household and taxpayers who are married filing jointly must have AGI of no more than $54,750 and $73,000 respectively.
Depending on your income level, the credit, which is also called the Retirement Savings Contribution Credit, is worth 50 percent, 20 percent, or 10 percent of your retirement plan or IRA contribution up to $2,000 ($4,000 if married filing jointly.) 1
If you haven’t yet contributed to your IRA for 2022, there’s still time. You have until the tax filing deadline to make a prior year contribution and claim the Saver’s Credit.
2. Child and Dependent Care Tax Credit
The Child and Dependent Care Credit, which is sometimes overlooked, may be available if you paid someone to care for your child, spouse, or dependent last year so you could work or look for employment.
The amount of your credit falls between 20 percent and 35 percent of your allowable expenses, which cannot exceed $3,000 for one dependent or $6,000 for two or more. For example, if you paid qualifying expenses of $6,000 or more for two or more dependents, the maximum amount of your credit would be $2,100 ($6,000 x 35 percent). The percentage you use depends on the amount of your adjusted gross income.
The amount of qualifying expenses that may be used to determine the credit is also reduced by the amount of any employer-provided dependent care benefits that you deduct or exclude from your income. The IRS provides an online tool to help determine whether you are eligible to claim the Child and Dependent Care Credit.
In addition, there is the Child Tax Credit, which may be worth up to $2,000 per qualifying child under age 17 depending on your income. The Child Tax Credit can be claimed in addition to the credit for Child and Dependent Care expenses if you are eligible.
3. Education tax breaks
College students and their parents generally know that they can claim an education credit or deduction, but they don’t necessarily choose the best one.
Jones said parents should review all of the education tax breaks available to be sure they’re getting the biggest bang for their buck. “Among more middle-income taxpayers, we see people not taking the correct education credit,” said Jones. “You need to look at them all, figure out which you are eligible for, and determine which works best for you.”
The American Opportunity Tax Credit, for example, provides a credit for qualified education expenses paid for an eligible student for the first four years of higher education. The maximum annual credit per student is $2,500. If the credit brings the amount of tax you owe to zero, the IRS website indicates you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.2
To claim the full credit, your modified adjusted gross income must be $80,000 or less ($160,000 or less if married filing jointly.) Other eligibility restrictions apply.
The Lifetime Learning credit, on the other hand, is available to taxpayers who pay qualified education expenses for an eligible student (the taxpayer, their spouse, or a dependent) who is engaged in a post—secondary degree program or training to improve their job skills. It’s worth a maximum of $2,000 per tax return and there is no limit on the number of years you can claim the credit.3
Note that you cannot take both the American Opportunity Credit and the Lifetime Learning Credit in the same tax year.
4. Earned Income Tax Credit
The Earned Income Tax Credit (EITC), which is available to certain working people with low to moderate income, is another tax benefit that’s easy to miss.
The maximum amount of credit for tax year 2022 is $560 for childless couples, $3,733 for ‘families with one qualifying child, $6,164 for families with two qualifying children and $6,935 for those with three or more qualifying kids.
Taxpayers must qualify based on a specific set of criteria, including their earned income, adjusted gross income, and number of children. A married taxpayer filing jointly with two children, for example, must have earned income and AGI of less than $55,529. The rules regarding eligibility for, and the amount of, the earned income tax credit can be complicated. It’s best to consult a qualified tax advisor if you have questions about the credit.
Normally, tax credits can only reduce your tax to zero, but the IRS notes the EITC and the Child Tax Credit can actually exceed your tax liability. This means that even if you don’t owe anything in taxes, you may still be eligible for a refund.
5. Energy-saving tax credits
If you made home improvements last year that include energy-efficient upgrades, you may not only benefit from lower heating and cooling bills, but lower taxes as well.
Homeowners in 2022 may receive a partial tax credit for the expenditure of energy efficient improvements for qualified solar electric systems. Limitations and restrictions apply.
Taxes may be a fact of life, but that doesn’t mean you need to give the government more than you owe.
By claiming all the credits and deductions for which you are entitled, you can potentially reward yourself with either a bigger refund for 2022 or a lower tax liability. “There are lots of tax breaks available, especially for lower income taxpayers,” said Thompson. “Many are easy to overlook.”
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This article was originally published in March, 2016. It has been updated.
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1 Internal Revenue Service, “Retirement Savings Contributions Credit (Saver’s Credit),” December 21 2022.
2 Internal Revenue Service, “American Opportunity Tax Credit,” February 16, 2023.
3 Internal Revenue Service, “Lifetime Learning Credit,” January 27, 2023.