As we close the books on February, we have a little over a month and a half to get our tax returns complete. With that said, the sooner you can file the faster you will get a refund if you have one coming to you.
The IRS is shorthanded so it is expected to take even longer for returns to be processed and that means delays in getting your refund. If you file prior to April 15 though, when the IRS staff capacity isn’t overwhelmed, you may find that you get your refund pretty quickly. Timing is everything.
On the other hand, if you complete your return and you find you owe money, there is no award for filing and paying before April 15, so why not keep your money until that date?
Here are a few of the most commonly overlooked tax deductions, so be sure you are getting the most money back you can and taking the deductions you are entitled to. Also, if you use Turbo Tax or another do-it-yourself software, be sure you take advantage of coupon codes to get the software cheaper and find out if you qualify for the free filing option.
Your state will send you a Form 1099-G in the mail letting you know how much money you received as a refund. On the federal return it will ask you about how much your state refunded you last year and you might think you need to put that number in that box. Not so fast! This is only required if you deducted the state income tax from your prior year return. This would happen if you itemized last year. If you didn’t itemize, hold onto that form for your records, but you don’t need to include that income. You will be overreporting your income if you do and paying taxes on too much income.
Charitable Contributions – Expenses associated with charitable giving are generally tax deductible. Whether it’s driving to a charity for your weekly volunteering and recording the mileage, or sending out a mailer and paying for paper, stamps and envelopes, all expenses associated with giving back can provide valuable deductions to you. If you take advantage of them, you have a few extra bucks to give back to your favorite charity. Keep your receipts and if the amounts are higher than $250 you need to get a confirmation from the charity. This deduction is generally an itemized deduction. Keep in mind that giving to the local family through GoFundMe generally isn’t deductible, so you may want to convince your local church or community charity to help the family and give your money to that organization instead.
Sales and Income Tax Deduction – before I moved to Tennessee (which has relatively low property taxes and no income tax) deducting my state income taxes was the way to go. You have a choice of deducting either your state income tax or your state sales tax. The only issue is that the sales tax and property tax together can’t eclipse the $10,000 limit that was imposed in the 2017 tax law. So, in states with high property taxes and high income taxes you may find that the income tax is the better way to go. Here in Tennessee the sales tax deduction might make more sense for you, so keep those receipts. You gotta love no state income tax!
Child Care Credit – For 2022 we revert back the credit of $3,000 for the first child and a maximum of $6,000 for two-plus children. The amount you can get as a credit is between 20% and 35% of qualified child care expenses and it was subject to an income phaseout starting at $15,000. If your income is over $43,000, the maximum credit is 20%, with no maximum income to receive the 20% rate. (See IRS Publication 503 for more details and who can claim the credit.)
Child Tax Credit – Not to be confused with the child care credit, this one is a credit of $2,000 per child for children under age 16 (in 2021 the amount was $3,000). There was an enhanced credit of $600 per child under the age of 6 in 2021 but that expired and is not available in 2022, as the American Rescue Plan Act of 2021 is no longer in effect.
Got college students? There are credits for college students as well. There is the American Opportunity Credit, or AOC (I’m guessing one congresswoman likes that name) as well as the Lifetime Learning Credit.
There are many more—if you want me to share them, let me know and I’ll send you a longer list.
When it comes to lowering your income tax bill, one of the key things you can do is plan ahead of time. It’s great to have a financial advisor like Red Barn Financial that can help you manage and minimize your tax liability through financial planning and working with your tax professional. The time when you are doing your taxes is not the time to try to plan; it’s the year before. Get started now planning for next year’s taxes. Working with Red Barn Financial could be a good place for you to start.
(This article is for informational purposes only and does not constitute tax, legal or financial advice. The information is not meant to be comprehensive nor to encompass all possible deductions that might apply to your situation. Please consult your tax advisor for specific applications.)
