10 Overlooked Tax Credits and Deductions for 2023

2. Child Tax Credit

The child tax credit for 2023 is up to $2,000 for each qualifying dependent younger than 17, with $1,600 of this credit being potentially refundable for 2023. There are income restrictions, and the amount of the credit will decrease if clients’ modified adjusted gross income exceeds $200,000 for single filers and $400,000 for joint filers. Those with higher incomes may be eligible for a partial tax credit.

There are a number of additional requirements to claim this credit including the child’s age, dependency status, residency, citizenship and others. Remember, a tax credit is a direct reduction in tax liability as opposed to a deduction for which clients receive only a percentage of the amount.

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3. Child and Dependent Care Credit

Clients may be able to claim the child and dependent care credit if they paid for the expenses for care for a qualifying individual in order to allow a client or spouse to be able to work or actively seek employment.

Qualifying individuals can include a dependent child younger than 13, spouses who are physically or mentally unable to care for themselves or individuals who lived with a client for at least half of the year and were physically or mentally unable to care for themselves. There are a number of situations under the last scenario that can qualify.

The total amount of expenses that can be used to calculate the credit is $3,000 for one qualifying individual and up to $6,000 for two or more qualifying individuals. The actual credit will be a percentage of those expenses, generally in the 20% to 35% range.

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4. Out-of-Pocket Charitable Deductions

Many clients will make charitable contributions during the year via check or perhaps by donating appreciated securities. Beyond this, though, many people make additional contributions in the form of cooking for a soup kitchen, costs to travel to or from volunteering or other types of miscellaneous expenses and donations related to helping a charity. These additional expenses and contributions can also be deductible.

It’s important to keep any receipts or other records to document these expenses. There are restrictions and limitations on deducting certain types of expenses, and clients must itemize to take advantage of this deduction.

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5. Jury Duty Pay Given to an Employer

It is common for many employers to pay employees’ full salary while they are performing jury duty. The employer might ask employees to turn over any fees they receive for jury duty to them.

While this is fair, it can create a tax issue. The fees received for jury duty would be taxable income. If clients turn the fees paid to them for their jury duty service back to their employer, they can deduct these fees from their income for the year.

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6. Gambling Losses

Gambling losses can be deducted only to the extent that a client has gambling winnings to offset them. Clients must be able to itemize deductions on their tax return and must have accurate records to back up their losses as well as their winnings for the year. Losses would be claimed as other itemized deductions on Schedule A.

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7. Home Office Deduction

If clients are self-employed and their primary place of business is a home office, they can take a home office deduction. It's important that they keep accurate records and abide by Internal Revenue Service rules. Note that clients with a self-employed side gig in addition to a regular job may also qualify.

The portion of their home being claimed for the deduction must be clients’ principal place of business. They can take the percentage of their home used for business and deduct that percentage of the home expenses to calculate the home office deduction. This includes a portion of the utilities, mortgage or rent, property taxes and others. Alternatively, they can use the simplified method whereby they can deduct $5 per square foot up to 300 square feet.

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8. Qualified Business Income Deduction

Another potential deduction for clients who are self-employed is the qualified business income deduction. Businesses that are sole proprietorships, LLCs, S-Corps or partnerships may qualify. The business must be located within the United States, and there are income limitations based on clients’ filing status for their personal return.

Qualified business income, also known as the 199A deduction, allows owners of pass-through entities to deduct up to 20% of their share of qualified business income on their 1040. Note that there are a number of restrictions and requirements beyond the income limitations and the requirement that the business be domestic. These can include the type of business and other factors.

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9. State Sales Tax Deduction

This deduction may make the most sense for clients who live in states with no state income tax. These states are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. For states with both a state sales tax and a state income tax, taxpayers need to choose which one to deduct, or in some situations they may be able to deduct a portion of both.

For those taking the state sales tax deduction, there are two ways to claim it. The first involves using the IRS tables for their state. In addition, they may be able to add in sales taxes on a big-ticket purchase like a vehicle, a boat, an airplane and others. Alternatively, they can keep track of all state sales taxes paid throughout the year and use that figure. Note that this deduction is subject to the $10,000 state and local tax deduction cap under the Tax Cuts and Jobs Act.

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10. EV Tax Credit

The electric vehicle tax credit is a nonrefundable tax credit available on the purchase of certain new or used electric vehicles. The tax credit for new vehicles is up to $7,500, while the credit for used EVs can be up to $4,000. For 2023 there is a list of eligible vehicles; the list will likely be changing for 2024.

Currently, the credit is dependent upon where the vehicle and some of its components are made, the cost of these components and the buyer’s income. Some of these rules will become stricter in 2024. Also in 2024, taxpayers will have the option to transfer the credit to the dealer at the point of sale, meaning they would receive a discount on the purchase instead of waiting for the credit until they file their taxes the following year.

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