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Credits & Deductions! There are still many credits and deductions available. To help you get organized and not miss a credit or deduction, we are highlighting some key items to help you get a bigger refund. If you should have any questions or need further explanation, please do not hesitate to call us.
Tax Breaks for Education – There are now only three major education tax breaks for 2023.
Interest on Education Loans – Interest paid on education loans will be deductible, subject to limitations ($2,500 max in 2023). The limit on the deduction will be reduced after your modified AGI reaches $75,000 ($155,000 if MFJ) and will be gone after your modified AGI reaches $90,000 ($180,000 if MFJ). Married filing separately returns do not qualify.
American Opportunity Credit – This Credit allows you to claim a maximum credit of $2,500 (100% of the first $2,000 and 25% of the next $2,000 of qualified education expenses). The credit is available for the first four years of postsecondary education, and 40% of the credit is refundable for most taxpayers. The American Opportunity Credit begins to phase out after your modified AGI reaches $80,000 ($160,000 for MFJ) and is completely phased out after your modified AGI reaches $90,000 ($180,000 for MFJ). The student must be enrolled in a program that leads to a degree, certificate, or other recognized educational credential and is taking at least ½ of the normal full-time workload for his or her course of study for at least one academic period during the calendar year. Qualified education expenses include tuition, enrollment fees, and course-related books, supplies and equipment.
The Lifetime Learning Credit – This credit allows you to claim a maximum credit of 20% of the first $10,000 you pay for qualified expenses for all students in your family. The Lifetime Credit is not based on workload, nor limited to the first four years of postsecondary education, and there is no limit on the number of years for which the credit can be claimed. The Lifetime Learning Credit begins to phase out after your modified AGI reaches $80,000 ($160,000 for MFJ) and is completely phased out after your modified AGI reaches $90,000 ($180,000 for MFJ).
Only one education credit or a tax-free withdrawal from an education IRA can be taken per student per year. In addition, only the person claiming the student as a dependent can claim the higher education credit for a student’s expenses.
Education Savings Accounts (ESAs) – You can make nondeductible contributions of up to $2,000 per year into a special IRA to pay the educational expense of a designated beneficiary who is currently under the age 18. The maximum amount that can be contributed each year begins to phase out at a modified AGI of $95,000 and is phased out completely at $110,000 ($190,000 to $220,000 if MFJ). Earnings on distributions will be distributed tax free, provided that they are used to pay the beneficiary’s postsecondary, elementary or secondary education expenses. In addition, qualified expenses can include room and board if the student is enrolled at least half-time. Hot: You can take a tax-free distribution from an ESA and claim an American Opportunity Credit or Lifetime Learning Credit as long as the same expenses are not used for both benefits.
Health Insurance Deductions – For 2023, the part of your self-employed health insurance premiums that you can deduct as an adjustment to income is 100%. The deduction cannot exceed the profit derived from the self-employed business. In addition, no deduction is allowed for any calendar month for which the taxpayer is eligible to participate in any subsidized health plan maintained by any employer of the taxpayer or of the taxpayer’s spouse.
Roth IRAs – A Roth IRA permits a taxpayer to make nondeductible contributions to a specially designated IRA. The distributions from this IRA would be nontaxable provided the funds stay in the IRA for a period of at least 5 years. Contributions can be made at any age. Contributions are subject to the normal IRA limitations of $6,500 per taxpayer (7,500 if age 50 or older at the end of 2023) less amounts contributed to the normal IRAs. The contribution limits are further reduced if the taxpayer’s modified AGI exceeds $138,000 and is phased out completely at $153,000 ($218,000 – $228,000 if MFJ and $0 – $10,000 if MFS and lived with spouse any time during the year). Under most circumstances, regular IRAs may be rolled over into Roth IRAs. Such a rollover requires the taxpayer to include in income the value of the rolled over IRA less any basis the taxpayer may have. The taxable amount is not subject to the 10% penalty for early distribution.
Traditional IRAs – Any individual can set up a traditional IRA if he or she receives taxable compensation during the year. Contributions provide for current year tax deductions but may be subject to phaseout rules. Withdrawals are taxable when distributed. Contributions are subject to normal IRA limitations of $6,500 per taxpayer (7,500 if age 50 or older at the end of 2023). If an individual is covered by an employer retirement plan or through self-employment, the deduction for an IRA contribution decreases (phases out) when their Modified Adjusted Gross Income (MAGI) is $116,000 – $136,000 (MFJ), $73,000 – $83,000 (S, HOH), $0 – $10,000 (MFS). If the individual is not covered, but the spouse is, the non-covered participant’s deduction is phased out when MAGI is $218,000 – $238,000 (MFJ), $0 – $10,000 (MFS). If a taxpayer cannot deduct all or a portion of an allowable IRA contribution, the taxpayer can choose to make a nondeductible contribution.
Simplified Employee Pension (SEP) – A SEP is a written employer plan that allows the employer to make deductible contributions into an individual retirement arrangement on behalf of the employee (SEP IRA). For this purpose, a self-employed individual can contribute to his or her own SEP. The SEP IRA is owned and controlled by each employee or self-employed individual. The employer makes contributions to the financial institution where the employee maintains his or her SEP. As an IRA, the employee is always fully vested in the account and has complete freedom to move the funds or withdraw the funds at any time. The allowed annual contribution to a SEP IRA is limited to the lesser of $66,000 or 25% of the participant’s compensation (20% of net self-employment income after one-half SE tax deduction).
SIMPLE IRAs – A SIMPLE IRA allows employees to choose the financial institution that will serve as trustee. The employee also has the right to roll over or transfer funds in a SIMPLE IRA to another financial institution at any time without having to first meet any vesting requirements. As an IRA, the SIMPLE plan does not have vesting rules. Participants are always 100% vested in the plan, including employer matching contributions. Employers can set up a SIMPLE IRA for employees if they have 100 or fewer employees who received $5,000 or more in compensation from the employer in the preceding year. A self-employed individual is treated as both an employee and the employer of his or her business. Compensation equals net earnings from self-employment before subtracting any contributions made to the SIMPLE IRA. During the 60-day period before the beginning of any year, and during the 60-day period before the employee is eligible, the employee can choose the amount to defer from wages into the SIMPLE IRA, expressed either as a percentage of compensation or a specific dollar amount. The election to defer wages can be canceled at any time during the year. Contributions cannot exceed $15,500 in 2023. If permitted by the SIMPLE IRA plan, participants who are age 50 or over at the end of the calendar year can also make catch-up contributions in the amount of $3,500. Distributions are generally treated the same as distributions from any other IRA, except for the 2-year rule. Funds in a SIMPLE IRA must remain in a SIMPLE IRA for at least two years from the date the employee first participated in the employer’s SIMPLE plan before they can be rolled over into any other type of retirement plan (including traditional IRAs). However, rollovers are permitted from one SIMPLE IRA to another SIMPLE IRA during the 2-year period. The 2-year period begins on the first day on which contributions made by the employer are deposited into the employee’s SIMPLE IRA. The 10% early withdrawal penalty that applies to other retirement plans and IRAs also applies to SIMPLE IRAs. However, the 10% penalty is increased to 25% if the early withdrawal occurs during the initial 2-year period.
Penalty on Early Distribution of an IRA/Pension. Are you considering cashing in your IRA or pension? Unless you are over 59½ or meet the qualifications for penalty exceptions, you will be subject to a 10% penalty on distributions from an IRA or pension. This is in addition to your regular tax liability. You may want to consider “rolling” the IRA or pension into another plan. Ask the holder of your IRA or company’s benefit person for details.
