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All of these could lower your tax burden for 2023.
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Taxes can be a huge burden, whether you have $1 million in the bank or no money in your savings account whatsoever. That’s why it pays to do what you can to eke out tax savings. And claiming the right tax credits is a good way to go about that.
A tax credit is a dollar for dollar reduction of your tax liability. It differs from a tax deduction, because what those do is simply exempt a portion of your income from taxes.
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Here’s how to understand the difference. If you claim a $1,000 tax credit, you lower your tax liability by $1,000 no matter what your effective tax rate is. If you claim a $1,000 tax deduction, the amount of tax savings you reap will hinge on what your tax rate looks like. So if you fall into the 22% bracket, that $1,000 deduction will mean saving $220 on your tax bill.
Meanwhile, there are a number of lucrative tax credits you may be eligible to claim in 2023. Here are three to keep on your radar — especially if you have kids.
1. The Child Tax Credit
The Child Tax Credit got a lot of press in 2021, when its maximum value was boosted and half of the credit was paid in monthly installments that hit bank accounts from July through December of that year.
In 2023, the Child Tax Credit is worth a maximum of $2,000 per qualifying child. Up to $1,500 is refundable. For a child to qualify, they must be under 17.
You can claim the full amount of the Child Tax Credit if your income is $200,000 or less as a single tax filer, or $400,000 or less as a joint filer. From there, the credit begins to phase out until it’s eventually worth nothing.
2. The Child and Dependent Care Credit
The Child and Dependent Care Credit is available to parents who pay for childcare so they can work. To qualify, you and a spouse (if filing a return jointly) must both have earned income. You can claim between 20% to 35% of up to $3,000 in childcare costs for a single child under age 13, or up to $6,000 in childcare costs for two or more children under aged 13.
Now if that sounds confusing, well, it is. But let’s say your earnings are such that you can only claim 20% of childcare costs for one child. If you spend $8,000 a year on childcare, you can still only claim 20% of $3,000, or $600 as your credit.
3. The Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a credit designed to assist lower earners. And what makes it really valuable is that it’s fully refundable, so if you owe the IRS nothing, you can still receive the full value of the credit.
You can qualify for the credit based on your income and number of dependents. You also can’t have more than $10,300 in investment income to qualify.
This table summarizes who’s eligible for for the EITC, and what the credit is worth:
Clearly, these credits, individually and collectively, could save you a bunch of money on your taxes in 2023. Be sure to claim them if you’re eligible. And if you’re not sure, consulting with a tax professional is a good bet.
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