While tax season is over for most of us, it is never too early to start thinking about next year. If you owed more taxes than you thought, or didn’t get the tax refund you were hoping for, take a look at some of these lesser-known deductions and credits that not everyone knows about. While online software does a decent job finding credits and deductions you qualify for, it may not find everything.
Note: all information provided below is for tax year 2023, where possible.
1. Student loan interest deduction
Qualified student loan interest you paid throughout the year is an above-the-line deduction – which means you don’t need to itemize to claim it. There are some stipulations, though. The income phaseout for the deduction starts at $75,000 MAGI (modified adjusted gross income) for single filers, and completely phases out at $90,000. For married filers, the phaseout ranges from $150,000 to $180,000. The deduction is only available for student loan interest, not the total amount paid towards student loans.
The parameters for qualifying student loans are fairly broad, and unlike some other government programs, private student loans qualify the same as public, government student loans.
2. Saver’s credit
Did you know you may be able to qualify for a tax credit just for saving for retirement? The saver’s credit is worth up to $1,000 for single filers or $2,000 for married filers. To be eligible, you have to be 18 or older, not a full-time student, and not a dependent on someone else’s return. The income limits do exclude many middle and high-income families. Your AGI must be under $36,500 (single) or $73,000 (married) in 2023 to qualify for the credit. Depending on your AGI, you may be able to take a credit for 10%, 20%, or 50% of the value of your retirement account contribution (limited to $1,000/single or $2,000/married).
Contributions to traditional and Roth IRAs, 401(k)s, 403(b)s, 457(b)s, and more qualify. It’s important to note that this is a credit, not a deduction, which means it reduces your tax liability dollar-for-dollar.
3. Charitable deductions
Most folks know that charitable contributions are deductible, but they don’t know how to optimize their charitable giving tax deductions. You must itemize your deductions to claim charitable contributions, which means for most Americans, it may not make sense to claim charitable contributions on their taxes. However, if you give significantly to charity each year but still take the standard deduction, it may be worth lumping your contributions into one year and itemizing that year.
Here’s what I mean: if Tom and Patti give $25,000 to a qualified charitable organization each year, it may still be better for them to take the standard married filing jointly deduction of $27,700. But if they only give $50,000 every other year – still giving the same amount over time – they could itemize and deduct those contributions, potentially up to 60% of AGI.
Giving to charitable causes doesn’t open up any secret tax loopholes where you end up making more money by giving, but for those who are naturally generous, it is certainly nice to get a little back on your taxes. Studies have shown that generosity has a positive effect on happiness. Even if you won’t ever itemize charitable contributions, giving can still have a positive impact on you and your community.
4. Child tax credit
The expanded child tax credit no longer exists, but the OG child tax credit is still around. In 2023, the credit is worth up to $2,000 per qualifying child, and up to $1,500 of that credit is refundable. Only children under 17 qualify, and you can only claim the full credit if your MAGI (modified adjusted gross income) is under $200,000/single or $400,000/married (income phaseouts start at those thresholds).
5. Child and dependent care credit
It’s easy to get the child tax credit and child and dependent care credit confused. The child and dependent care tax credit is for reimbursing parents for childcare while they work. Only parents with children 12 and under can qualify (unless your spouse or other person(s) claimed on your tax return require paid care). You and your spouse (if married) must have earned income to qualify, and you must have paid for care so you could work or look for work.
The amount of qualified expenses is $3,000 for one person or $6,000 for two or more. Depending on your income, you can claim 20% to 35% of those qualified expenses as a tax credit. The credit does not phase out for high-income earners, but the percentage of expenses they can take as a credit is reduced.
6. Mortgage interest deduction
Great news for everyone who is buying a home at interest rates over 6%: you may be able to deduct your mortgage interest paid. This is an itemized deduction, so it may not make sense to take if you don’t have other itemized deductions or if the standard deduction will end up being more beneficial. On homes purchased before December 16th, 2017, you can deduct interest on loans up to $1 million; if you purchased on or after that date, the current limit is $750,000.
If the mortgage interest deduction alone doesn’t make it worth itemizing, you may be able to combine other itemized deductions, like charitable contributions, to make it worth your while. Many homebuyers today are paying more in interest on their home loans, which may be deductible if they itemize.
There is no secret to paying less in taxes, but planning your tax year in advance can help you maximize opportunities throughout the year so you aren’t scrambling each year at tax time. For planning throughout the year, I have enjoyed using the Taxes App which helps you determine if you are on-track to pay the right amount in taxes. Nobody likes getting a surprise tax bill in April, and getting a hefty refund isn’t optimal for Financial Mutants. Check out our Money Guy Tax Guide for information on other credits, deductions, tax rates, and more.
