Understanding Tax Credits and Tax Deductions: A Guide for Couples

It’s important for married couples to be aware of tax credits and tax deductions. These two terms can be confusing to understand, and many couples are not sure about the difference between them and how they can use them to their advantage. In this blog post, we’ll explain what tax credits and tax deductions mean and provide examples of each. By the end of this post, you’ll have a better understanding of how to maximize your tax savings and strategically employ your tax credits and tax deductions to reduce your overall tax liability.

Tax deductions are expenses, such as mortgage interest, state and local taxes, charitable contributions, and medical expenses that can be subtracted from your taxable income. This means that your taxable income will be reduced by the amount of your deduction, which in turn will decrease your tax bill. However, it’s important to remember that not all deductions are equal. The IRS allows you to choose between taking the standard deduction or itemizing your deductions. The standard deduction is a flat amount that the IRS allows you to deduct from your taxable income. For example, for 2022, the standard deduction for married couples filing jointly is $25,900. If your total itemized deductions are less than the standard deduction, it’s better to take the standard deduction.

Tax Deductions.

When filing taxes as a married couple, you have access to several tax deductions that are specifically designed for married couples. These deductions can help reduce your taxable income, which in turn reduces the amount of taxes you owe at the end of the year. Here are some of the most common tax deductions married couples should take advantage of:

  1. Mortgage Interest Deduction: If you own a home with your spouse, you may be eligible to deduct mortgage interest from your taxable income. This deduction applies to interest paid on loans used to purchase, build, or improve a home.  Many realtors will tout this deduction when selling you a home.  Realtors don’t often understand taxes and many times I work with clients whose realtor touted the great deduction of mortgage interest.  In reality, as explained above if you don’t exceed the standard deduction the mortgage interest deduction does not reduce your taxes by 1 penny.  
  2. Charitable Contributions Deduction: Married couples can deduct charitable contributions from their taxable income. This deduction is available for donations made to qualified organizations such as charities, churches, and nonprofit organizations.  The value of the deduction again depends on if you exceed the standard deduction.  That being said, a complicating factor is that the IRS does not assign a very high value to donated items. Many of my clients are surprised when they donate items at the rather low amounts the items are valued at.  You have to use a reasonable value of the donation. You can use the goodwill guide to help figure out how much your donation is worth.  Goodwill guide.
  3. Student Loan Interest Deduction: If you have student loan debt with your spouse, you may be able to deduct up to $2,500 of student loan interest per year. This deduction is only available if no one else claims an exemption for the same debt and both spouses are legally obligated to pay it off.

Tax Credits.

On the other hand, tax credits reduce your tax bill dollar for dollar. This means that if you owe $1,000 in taxes and have a $500 tax credit, you only need to pay $500. Tax credits are available for a wide range of expenses, such as education, child care costs, adoption, and home energy efficiency improvements. There are also tax credits available for businesses that make energy-efficient upgrades, hire new employees, or invest in research and development. It’s important to note that some tax credits are non-refundable and some are refundable.  A tax credit that is non-refundable means that if the credit amount is more than your tax bill, you can’t receive a refund for the difference.  A refundable credit allows you to make full use of the tax credit, even if you owe $0 in tax.  

Tax credits are even more beneficial than deductions because they directly reduce the amount of taxes you owe at the end of the year. Here are some of the most common tax credits available to married couples:

  1. Earned Income Tax Credit: The Earned Income Tax Credit (EITC) is a tax credit for qualifying individuals and families who earn low to moderate incomes. It helps reduce the amount of taxes owed, and may even give you a refund. To qualify for the EITC, you must meet certain requirements like income limits, age restrictions, citizenship status, and have a valid Social Security Number. In addition, you must have earned income from employment, self-employment, or another source during the tax year. The amount of your credit depends on your income and how many qualifying children you have. You may be able to claim up to $7,430 in EITC for 2022 depending on your filing status and other qualifications.  Overall, the Earned Income Tax Credit is a great way to reduce taxes owed and potentially receive a refund from the IRS. To get started on your EITC claim, make sure that you meet all of the eligibility requirements and calculate your potential credit amount. Doing so will help ensure that you receive the maximum benefit of the EITC.  Check out the IRS website to learn more about eligibility and how to file for the Earned Income Tax Credit!
  2. Child Tax Credit: The child tax credit is a federal tax credit that helps parents with the costs associated with raising children. This credit can be claimed for each eligible child and could save you up to $2,000 per child. Eligible children must be under 17 years of age and the child must be a U.S citizen, a U.S national or a resident alien with an Individual Taxpayer Identification Number (ITIN). In order to claim this credit, you will need to provide proof of the child’s identity and other qualifications. If your child is over the age of 17 you may still be able to claim this credit.  The amount is reduced to $500 and continues if the child remains your dependent such as if attending school.
  3. Child and Dependent Care Credit: If you pay for childcare expenses while both spouses are working or attending school full-time, you may qualify for the Child and Dependent Care Credit. This credit can help offset some of the costs associated with daycare or babysitting services. The amount of the credit is based on your total childcare expenses up to $3,000 for one child or up to $6,000 in 2022 for two or more children. You must provide your dependent care provider’s name and taxpayer identification number in order to claim this credit.  Most day care providers are used to providing this information and generally include on billing statements.  You can also include the costs you pay a nanny for childcare costs in the computation of this credit.
  4. Adoption Tax Credit: If you have adopted a child, you may qualify for the Adoption Tax Credit. This credit can help with expenses related to adoption such as attorney fees, court costs, and travel expenses. The amount of the credit varies depending on your filing status and other qualifications. You will need to provide proof of all expenses related to the adoption in order to claim this credit.
  5. Education Tax Credits: The American Opportunity Credit and the Lifetime Learning Credit both help with expenses related to post-secondary education. The credits can be used for tuition, books, supplies, and other necessary expenses. You must provide a statement from the school showing the amount paid for these costs in order to claim them on your taxes.  This statement is known as a 1098-T.  This credit starts phasing out when the adjusted gross income for a married couple equals $160,000 and is totally phased out at $180,000.
  6. Retirement Savings Contributions Credit: This credit is for those who make contributions to a retirement account, such as an IRA or 401(k) and have a low income.  The maximum adjusted gross income a couple can have and make use of this credit is $68,000 in 2022. The amount of the credit varies depending on filing status and income. You will need to provide proof that contributions were made in order to claim this credit.

In some cases, you may be eligible for both tax credits and tax deductions for the same expense. For example, if you make a charitable contribution, you can deduct the amount of your contribution from your taxable income and also claim a tax credit for the same donation. However, it’s important to note that the IRS has rules about “double-dipping,” or claiming both a deduction and a credit for the same expense. For example, if you claim a deduction for a higher education expense on your tax return, you can’t also claim a credit for the same expense.

Understanding the difference between tax credits and tax deductions is essential to maximizing your tax savings as a married couple. While both tax credits and tax deductions can help reduce your tax bill, they work differently and can apply to different expenses. It’s important to keep up-to-date with IRS regulations and consult with a tax professional for advice on how to take advantage of the tax credits and deductions available to you. With the right knowledge, you can reduce your tax bill and keep more of your hard-earned money in your pockets.