Tax Tips for Individuals Edit as Admin
Tuition Credits: The American Opportunity Tax Credit is available to a broad range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four years of post-secondary education. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.
The Lifetime Learning Credit is 20% of the first $10,000 of qualified expenses. This credit is not limited to four years of study.
For both credits, beginning in 2022, the full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels.
Adoption Credit and Exclusion: The maximum adoption credit or exclusion for employer-provided adoption benefits has increased to $14,890 for 2022. In order to claim either the full credit or exclusion, your MAGI (Modified Adjusted Gross Income) must be less than $223,410. For 2023 the credit is $15,950 and the phase-out begins at $239,230 .
Estate Tax: The estate tax has a top rate of 40%. The exemption amount is $12,060,000 per individual in 2022. The exemption will be $12,920,000 for 2023.
Gifting Amount: For 2022 you can gift up to $16,000 to each individual without paying gift taxes or applying it against your lifetime giving exclusion. Keep in mind that your spouse can also give up to $16,000 to the same individual and you can each also give $16,000 to the recipient's spouse. When both parties are married, this can effectively increase the total giving between the two couples to $64,000 in 2022. For 2023 the gift tax exclusion increases to $17,000 each.
Child Tax Credit: Parents can claim a tax credit of up to $2,000 per child younger than age 17 at the end of 2022. The child must be your dependent and related by blood such as a son or daughter, or descendant of either, legal adoption, a stepson or stepdaughter, or an eligible foster child. Other qualifying dependents may be eligible for a reduced credit of $500. The child's principal place of abode must be with the taxpayer for more than one half of the year. Only children who are U.S. citizens or legal residents can qualify. The tax credit begins to phase out for taxpayers with modified adjusted gross income above $200,000 ($400,000 for joint filers). These amounts are projected to remain unchanged for 2023.
Mortgage Interest Points: Points paid on a home mortgage are usually deductible as interest. If the mortgage is for the purchase or improvement of your principal residence, you can either deduct the full amount of the points in the year of payment or, if you aren’t itemizing your deductions that year, amortize the points over the loan term. Generally, points paid on refinancing must be amortized. However, you can write off any points you haven't yet deducted when you sell your home and pay off your mortgage.
Health Savings Account (HSA): When paired with a high deductible health insurance plan, an HSA can be a pretty significant tax savings tool. Contrary to medical expense deductions, which are a limited itemized deduction on Schedule A, contributions to an HSA are deducted to arrive at adjusted gross income. Funds held in the HSA are then used to pay medical expenses and reimburse yourself for medical expenses paid out of pocket. Under the Coronavirus Aid, Relief and Economic Security (CARES) Act passed in March 2020, additional expenses became HSA-eligible, many of which are over-the-counter medications and products. Withdrawals from the account are tax-free as long as they are used for medical expenses. Balances remaining in the account at year end are not lost, but remain in the account to pay for medical expenses incurred in future years. For 2022, individual coverage plans provide for a maximum contribution of $3,650 and the maximum for family plans is $7,300. Add $1,000 to the maximum if an individual is age 55 or older. The amounts increase to $3,850/$7,750 for 2023, with no change to the catch-up amount for older taxpayers.
IRAs: For 2022 the maximum contribution limit for traditional and Roth IRAs is $6,000. The maximum increases to $7,000 for individuals age 50 or older by the end of the year. For 2023, the the amounts increase to $6,500/$7,500. The deduction is phased out at higher income levels where the taxpayer or the spouse is an active participant in an employer-sponsored plan.
Roth Conversions: Distributions from a Roth IRA are received tax-free. You can convert a traditional IRA to a Roth-IRA, unless your income exceeds a certain level. You will pay the income tax upon conversion. But not everyone should convert. There are many factors to consider, including present and forecasted future income tax rates, as well as the return on your investments, both in your retirement plan and outside of your plan. You will also need to consider how a current increase in taxable income may affect other calculations on your tax return. Careful strategic planning and forecasting will help you make an informed decision.
Qualified Retirement Plan: One of the most powerful tax shelters available to taxpayers is a qualified retirement plan. Within certain limits, contributions to fund the plan are immediately tax deductible, plan investment earnings are tax deferred, and plan participants including owners and employees and self-employed individuals do not have to pay income taxes on plan benefits until they receive their distributions. The maximum 401(k) elective deferral for 2022 is $20,500, and increases to $27,000 for participants age 50 and older by the end of the year. For 2023, the amounts increase to $22,500/$30,000. In addition, if you contribute to your employer-sponsored plan, you may receive a matching contribution from your employer, usually up to a certain percentage.
Charitable Contributions: For 2022, you can deduct contributions to 501(c)(3) charities up to 60% of your adjusted gross income. You must itemize your deductions in order to take this deduction. For noncash donations (clothing, household goods, etc.) exceeding $500, you must provide contribution date, name and address of charity, description of items donated, cost basis and fair market value for each donation. Vehicle donations require additional information to be included. Noncash donations over $5,000 require the taxpayer to obtain a qualified written appraisal. Contributions to political organizations are not deductible.
2022 Special credits for Arizona filers: There are dollar-for-dollar tax credits available to filers of an Arizona tax return for contributions to Qualifying Charities (up to $800 married filing joint and $400 single) Public Schools (up to $400 married filing joint and $200 single), Private School Tuition Organizations (up to $2,483 married filing joint and $1,243 single) and Qualifying Foster Care Organizations ($1,000 married filing joint and $500 single). Credits are limited to tax liability. Don't overlook these credits. They have the effect of moving state tax dollars to Arizona charities and schools of your choice.