Deductions and Credits

Tax credits are subtracted directly from taxes owed, while tax deductions lower your taxable income. The following includes some federal tax credits and deductions.

STANDARD DEDUCTION

Indexed to inflation, the standard deduction, which reduces your taxable income, rose sharply in 2023.

For 2022, the standard deduction amount is $25,900 in 2022 ($27,700 in 2023) for married taxpayers filing jointly, $19,400 in 2022 ($20,800 in 2023) for those who file as heads of household, and $12,950 ($13,850 in 2023) for those who file as single or married filing separately.

CHILD TAX CREDIT

For tax years 2022 and 2023, the Child Tax Credit reverts back to a limit of $2,000 for every dependent under age 16. The credit begins to phase out for single filers with a modified adjusted gross income (MAGI) above $200,000 and $400,000 MAGI for joint filers.

CHILD AND DEPENDENT CARE TAX CREDIT

This credit in 2022 is less than in 2021, when a one-year boost increased the credit. For 2022 and 2023, the child and dependent care credit is 35% up to $3,000 of eligible expenses for one dependent and $6,000 for more than one. The credit is not refundable. In other words, you would get a $1,050 credit for $3,000 in expenses at 35% or $2,100 for 35% of $6,000 in expenses. The full credit phases out beginning at $15,000 in annual income.

ITEMIZED DEDUCTION LIMIT GONE

Itemized deductions, which were previously phased out for taxpayers with higher incomes, have no income-based limit in 2022 or 2023. Deduction limits were eliminated by the Tax Cuts and Jobs Act.

EMPLOYEE BUSINESS EXPENSE DEDUCTION

Most employees cannot claim unreimbursed business expenses as itemized deductions, but there are exceptions. Eligible employees include Armed Forces reservists, qualified performing artists, fee-basis state or local government officials and employees with impairment-related work expenses. All expenses must be paid or billed during the tax year.

HOME LOANS

Married taxpayers filing jointly may deduct the interest on a mortgage of up to $750,000 of principal. The deduction is limited to half of that for single taxpayers. Interest on home equity loans, home equity lines of credit (HELOCs) and second mortgages may be deducted only when used to buy, build or substantially improve the taxpayer’s primary or secondary qualified residence that secures the loan, subject to limits.

REAL ESTATE SECTION 1031 LIKE-KIND EXCHANGES

The treatment of investment property for Section 1031 exchanges is now limited to real property, including land and permanent structures on that land. Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality. You may be able to defer taxable gains when you sell investment property. You have 45 days after the sale to identify other income-producing property that you will purchase within 180 days of the sale, or by the due date of your tax return, including extensions. Your tax professional can give you more information

SALT TAXES

Taxpayers are limited to $10,000 of state and local tax (SALT) deductions. This provision is especially harsh on homeowners in high-tax states, where state income and property taxes can easily exceed this figure. As before, buying SALT credits is not allowed. As with all charitable contributions, you’ll have to reduce the amount of your contribution by the value of anything you receive.

If you are a partner in a partnership or owner of an S-corporation, discuss the pass-through entity tax with your tax professional as a workaround to the $10,000 SALT tax deduction limit.