When it comes to your taxes, we diligently take the time to make sure that appropriate credits and deductions are applied. However, after the end of the tax year, there is not much we can actively do to help you lower your tax bill. Working with you to identify changes we can implement during the tax year to help is what can really lower your tax liability. This is what tax planning is all about.
Most tax credits and deductions can only be acted upon during the tax year, not once the tax year is over. For example, if you were to contribute to charity in January of 2023, generally speaking, that contribution would be applied to your 2023 tax return. So it would not affect your upcoming tax bill you would be receiving just a few months later in April.
This is largely why we encourage proper tax planning. Tax planning provides you with information and options to make tax-smart decisions in the appropriate tax year.
September still gives you some time to make changes to your 2022 tax liability before the end of the year. Here are some tax credits you may want to consider before the year is up, but first let’s define what a tax credit is.
What is A Tax Credit?
A tax credit is a dollar-for-dollar reduction from your tax liability or your total tax bill.
Whereas a tax deduction is an amount deducted from your Adjusted Gross Income, which is what is used to determine the percentage you should be taxed at.
It is common for there to be confusion between tax deductions and tax credits. Ultimately, strategically using both in your tax planning can help you have a lower tax liability.
Tax Credits to Act on Before The End of The Year
Child and Dependent Care Credit
For children under the age of 13 and dependents who are unable to care for themselves, the IRS allows tax filers to apply the child and dependent care credit. This credit is to be used for expenses spent on child care while you were working, looking for work, or attending school.
The child tax care credit reduction amount has fluctuated over the last couple of years due to the American Rescue Plan. For the most updated information and credit, limitations are sure to reach out to your tax preparer.
American Opportunity Credit
If you or your dependent is currently in college, you may be eligible for the American Opportunity Credit. This credit allows you to deduct up to $2,500 per student for educational expenses. These expenses may include tuition, books, supplies, or equipment for their first 4 years of college.
There are some footnotes to this credit that may affect your eligibility. For example, filers that have an Adjusted Gross Income higher than $90,000 (or $180,000 when a joint filer) do not qualify.
It is also important to note with this specific credit, the student must be considered enrolled at a minimum half-time status.
Lifetime Learning Credit
This credit is very similar to the American Opportunity Credit except the student does not need to be a half-time to full-time student. As long as they are from an accredited institution, educational fees for even non-degree courses are permitted.
For this credit, there is a $2,000 limit which is by the filer, not by the student. Filers are also able to claim both the Lifetime Learning Credit and American Opportunity Credit if they are eligible for both.
Residential Energy Tax Credit
Thinking of going solar? This may be the last bit of encouragement you need to act now! For installing solar energy systems in your home you can apply a credit of up to 26% of the cost. It is important to note here – that percentage decreases in 2023 to 22%. In 2024, the credit expires!
Electric Motor Vehicle Credit
Those gas prices are still pretty high – here is another reason to consider switching to electric. Although the Inflation Reduction Act of 2022 limited the federal EV tax credits, there are some incentives still in place. There is a new credit for buying a used EV, worth up to $4,000. Note that vehicles must be assembled in North America and currently most are not. Additional requirements for EV credits will start phasing in December 31, so it might be prudent to make the purchase this year rather than waiting until next if you’ve been considering it.
There is still time to implement tax planning strategies for the 2022 tax year. If you are considering any of the activities above that would result in tax credits, make sure you understand requirements, limitations and phase-ins. Your tax professional can best advise you on what makes sense for your particular situation.