What to Claim on Taxes: Deductions, Credits, and Filing Tips

Tax season presents an opportunity to optimize your finances by making informed decisions about deductions and credits. Understanding what you can claim on your taxes is key to reducing your tax liability and potentially increasing your refund. Many taxpayers miss valuable opportunities due to a lack of awareness.

With accurate information, navigating deductions, credits, and filing statuses becomes less overwhelming. This guide provides essential insights into tax preparation, equipping you to handle your return effectively.

Deduction Options

Taxpayers have two main choices for deductions: the standard deduction and itemized deductions. Selecting the right option can significantly impact your taxable income, making it crucial to understand each approach.

Standard

The standard deduction reduces taxable income by a fixed amount without requiring itemized expenses. Adjusted annually for inflation, the amount varies by filing status. For 2023, single filers can claim $13,850, while married couples filing jointly can claim $27,700. This option is ideal for those without substantial deductible expenses, offering simplicity. However, taxpayers with significant expenses, such as mortgage interest or high medical costs, may benefit more from itemizing.

Itemized

Itemizing deductions allows taxpayers to claim specific expenses, such as mortgage interest, state and local taxes, charitable contributions, and medical costs exceeding 7.5% of adjusted gross income (AGI). Proper documentation, including receipts, is crucial for substantiating these claims. The Tax Cuts and Jobs Act of 2017 limits some deductions, such as capping state and local tax deductions at $10,000. Taxpayers should evaluate their expenses annually to determine if itemizing yields greater benefits than the standard deduction.

Eligibility Factors

Eligibility for deductions depends on factors like filing status, age, and income. Taxpayers aged 65 or older or those who are blind qualify for an additional standard deduction. Some deductions, such as medical expenses, have AGI-based thresholds that must be met. Additionally, the Alternative Minimum Tax (AMT) may limit or disallow certain itemized deductions, requiring careful evaluation of your tax situation.

Potential Tax Credits

Tax credits directly reduce the amount of tax owed, often offering more savings than deductions. Familiarity with available credits can help maximize benefits and potentially increase refunds. Key credits include those for education, dependents, and earned income.

Education

Education tax credits, such as the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC), help offset higher education costs. The AOTC provides up to $2,500 annually per eligible student for the first four years of post-secondary education. It is partially refundable, allowing up to $1,000 as a refund even if no tax is owed. The LLC offers up to $2,000 per return for tuition and related expenses, with no limit on how many years it can be claimed. Both credits are subject to income phase-outs, with the AOTC phasing out for modified adjusted gross incomes (MAGI) above $80,000 for single filers and $160,000 for joint filers in 2023.

Dependents

The Child Tax Credit (CTC) and the Credit for Other Dependents (ODC) provide financial relief for taxpayers with dependents. The CTC offers up to $2,000 per qualifying child under 17, with up to $1,500 refundable as the Additional Child Tax Credit (ACTC). The ODC provides a non-refundable credit of up to $500 for dependents who do not qualify for the CTC, such as older children or elderly parents. Both credits are subject to income phase-outs starting at $200,000 for single filers and $400,000 for joint filers. Accurate records, such as birth certificates and Social Security numbers, are essential for claiming these credits.

Earned Income

The Earned Income Tax Credit (EITC) benefits low- to moderate-income workers. The credit amount varies by income, filing status, and number of qualifying children. For 2023, the maximum EITC is $7,430 for taxpayers with three or more qualifying children. To qualify, taxpayers must have earned income and meet income thresholds, which differ based on filing status and family size. Errors in claiming the EITC can lead to penalties or disqualification from claiming it in future years. IRS tools, like the EITC Assistant, can help verify eligibility.

Filing Status Considerations

Choosing the correct filing status is critical for determining tax obligations and potential refunds. The IRS recognizes statuses including Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) with Dependent Child. Each status has unique eligibility requirements, standard deductions, and tax brackets.

For example, Head of Household filers enjoy a higher standard deduction and more favorable tax brackets compared to Single filers. Married couples typically benefit from filing jointly due to lower tax rates and access to certain credits, though there are situations, such as significant medical expenses, where filing separately may be advantageous. The Head of Household status requires maintaining a household for a qualifying person, such as a dependent parent, even if they do not live with the taxpayer.

Filing status also affects eligibility for credits and deductions. For instance, the EITC has different income thresholds depending on filing status. Married couples filing jointly should be aware that both spouses are generally responsible for the accuracy of the return and any tax owed. Consulting a tax professional or using IRS resources can help determine the most beneficial status.

Document Preparation and Recordkeeping

Effective recordkeeping is essential for accurate tax filing and financial management. Taxpayers must maintain documentation for income, deductions, and credits, including W-2s, 1099s, receipts, and financial statements. Organized records not only facilitate accurate reporting but also provide evidence in case of an audit.

Digital tools like accounting software or cloud-based storage can simplify recordkeeping, allowing taxpayers to categorize expenses and integrate with tax preparation software. Backing up digital records ensures data preservation. The IRS recommends retaining records for three to seven years, depending on the type of document.