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 advisor and accountant with Innovative Financial in Lakewood, Colorado. “When you start digging around, a lot of times you’ll find missed opportunities.”
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 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.
The IRS notes that, if you qualify, you can claim any credit, regardless of whether you itemize your deductions.
The following six credits and deductions, however, often get left on the table:
The Saver’s Credit, which helps low- and moderate-income workers save for their retirement, is easily overlooked, said Jones.
To be eligible, your adjusted gross income (AGI) must be no more than $31,000 for tax year 2017 for someone filing as single ($46,500 if head of household; $62,000 if married filing jointly).
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.)
If you haven’t yet contributed to your IRA for 2017, there’s still time. You have until the April 17 tax filing deadline to make a prior year contribution and claim the Saver’s Credit.
The filing deadline this year is slightly delayed because April 15 falls on a Sunday. Normally, the deadline would move to Monday, April 16, but a legal holiday in the District of Columbia (Emancipation Day) that day pushes the deadline one day more to April 17.
Unreimbursed employee expenses
Whether you work for someone else or own your own business, you may be able to deduct some of the unreimbursed expenses you incur to do your job. That may include business use of your car, meals and entertainment, travel, tax preparation fees, supplies, use of a home office, continuing education, and even subscriptions to work-related magazines.
“If you’re paying with personal funds for something work-related, it may be a write off,” said Sallie Mullins Thompson, a New York-based tax accountant and financial advisor. “A lot of times, an employee of a company thinks that he or she isn’t entitled to this write-off, or that they don’t have enough expenses to bother with, but if they look into it they may find more unreimbursed expenses than they thought.”
The IRS allows taxpayers to deduct certain work-related expenses that exceed 2 percent of their adjusted gross income as miscellaneous itemized deductions on Schedule A (Form 1040).
Generally, you apply the 2 percent limit only after you apply any other deduction limit, the IRS indicates on its website. For example, you would apply the 50 percent (or 80 percent) limit on business-related meals and entertainment before you apply the 2 percent limit.1
So you may want to pull out that pile of receipts and start mining for potential write-offs. But keep in mind, determining what business expenses are or are not deductible can be tricky, so it’s a good idea to consult a qualified tax advisor.
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, and $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%). 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 $1,000 per qualifying child under age 17 depending on your income for 2017. The Child Tax Credit can be claimed in addition to the credit for Child and Dependent Care expenses if you are eligible. (Note: For 2018 tax returns, filed in 2019, the Child Tax Credit doubles to up to $2,000 per eligible child, a changes as part of the tax reform bill, rising to $1,600
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
If you don’t qualify for the American Opportunity Tax Credit or Lifetime Learning credit, you may still be eligible to claim the tuition and fees deduction, which can provide up to a $4,000 tax break on the higher education expenses you paid during the year for yourself, your spouse, or your dependent – even if you do not itemize your deductions. The deduction is not available if your filing status is married filing separately or another person can claim you as a dependent.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 2016 is $506 for childless couples, $3,373 for families with one qualifying child, $5,572 for families with two qualifying children and $6,269 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 $50,198. 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.
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 may receive a credit of 30 percent of the expenditures made by a taxpayer during 2017 for qualified solar electric systems, solar water heaters, fuel cell techology, small wind energy, and geothermal heat pumps. 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 2017 or a lower tax liability. “There are lots of tax breaks available, especially for lower income taxpayers,” said Thompson. “Many are easy to overlook.”
More from MassMutual…
1 Internal Revenue Service, “Tax Guide 2017,” Dec. 12, 2017.
2 Internal Revenue Service, “American Opportunity Tax Credit,” Aug. 3, 2017.
3 Lifetime Learning credit, “Lifetime Learning Credit,” Aug. 11, 2017.
4 Internal Revenue Service, “Tuition and Fees Deduction at a Glance,” Aug. 28, 2017.