Welcome back Middle Child Money Crew! As a parent, every dollar counts when it comes to your family’s finances. One of the best ways to put more money back in your pocket is to take advantage of all the tax credits and deductions you’re eligible for. But what exactly are tax credits and deductions? And how can you use them to maximize your tax savings?
Before we dive in we must provide a small disclaimer with this article. While we believe it is super helpful information we realize that every person, and family has a different financial journey they are on. Therefore each person or family should consult with their own tax specialist to determine how these tax credits and deductions might play into your personal financial journey. The purpose of this post is to provide information only, and should be be considered as advice.
Let’s break it down in an easy-to-understand way.
What are Tax Credits?
A tax credit is like a gift card you can use to reduce the amount of tax you owe dollar-for-dollar. For example, if you owe $2,000 in taxes and qualify for a $1,000 tax credit, your tax bill gets slashed to $1,000. It’s that simple!
What are Tax Deductions?
A tax deduction reduces your total taxable income. So if your income is $50,000 and you have $10,000 in deductions, you’ll only be taxed on $40,000 of income. Deductions don’t directly reduce your taxes, but they can push you into a lower tax bracket, saving you money.
Now that we’ve got the basics down, let’s dive into some of the top tax credits and deductions families should take advantage of:
The Child Tax Credit
The Child Tax Credit is something that all families should be aware of.
This one’s a biggie for parents! The Child Tax Credit can reduce your taxes by up to $2,000 per qualifying child under age 17. Even better? Up to $1,400 of that is refundable, meaning you could get money back even if you don’t owe taxes.
The Earned Income Tax Credit is a fantastic credit for low-to-moderate income families. The amount varies based on your income and number of kids, but it can be worth up to $6,935 for 2023! This credit is also fully refundable.
The Child and Dependent Care Tax Credit
The IRS has made this Child and Dependent Care Tax Credit available to families who are trying to find solutions for affording child care. If you paid for daycare, after-school care, or a nanny while you worked or looked for work, you could qualify for a credit worth up to $4,000 for one child or $8,000 for two or more kids. That’s a huge help for families with childcare costs.
The American Opportunity Tax Credit
The American Opportunity Tax Credit provides help for those families seeking access to higher education. Parents of college students, this one’s for you! The American Opportunity Tax Credit can shave up to $2,500 off your taxes for each student’s first four years of undergrad tuition, fees, and course materials. Up to $1,000 of this credit is refundable too.
Student Loan Interest Deduction
Speaking of college costs, don’t forget to deduct up to $2,500 in student loan interest you paid over the year. This deduction is per tax return, not per student, but every little bit helps when paying off those loans! Check out the IRS for more information.
Mortgage Interest Deduction
Homeowners can deduct the interest paid on up to $750,000 of mortgage debt (or $375,000 if married filing separately). This is one of the biggest potential deductions for families with a mortgage. Check out the IRS for more information.
State and Local Tax Deduction
You can deduct up to $10,000 ($5,000 if married filing separately) of state and local property taxes, income taxes, or sales taxes. For families in high-tax states, this deduction can provide major savings. Check out the IRS for more information.
Charitable Contributions
Did your family donate money or goods to charity this year? You may be able to deduct those contributions from your taxable income if you itemize deductions. Save those receipts!
Medical Expenses Deduction
If your family had significant medical expenses not covered by insurance, you can potentially deduct any amount over 7.5% of your adjusted gross income. This includes costs like insurance premiums, prescriptions, dental treatments, and even mileage for doctor visits. Again, the IRS provides guidance for this one.
The key to maximizing your tax savings is to take full advantage of all the credits and deductions you qualify for. But be sure to keep immaculate records and consult a tax professional if you have any questions!
Remember, these tax hacks can potentially save your family thousands of dollars. So put on your money hat, gather those documents, and get ready to supercharge your refund this tax season. Every dollar you save is more money for family fun, college funds, or paying down debt. It’s a total win!
