🎭 Tax credits and tax deductions high earners need to know about

☕Good morning, and welcome back to "Making Sense of Your Money” with Dan Pascone– we live in the world of taxes, so you don’t have to! 

This week, we're diving deep into the realm of tax maneuvers that every tech professional should have up their sleeve: ​​Tax Credits vs. Tax Deductions.

🕹️Tax credits and deductions are great levers for reducing your tax bill, but each has its own rules, strategies, and limitations.

Tax credits are like a reward for completing a quest: you did X action or met Y criteria, so the government gives you Z amount of money off your taxes. 

💵 Credits directly reduce what you owe, dollar for dollar, while deductions lower your taxable income.

They're straightforward: a $1,000 credit saves you $1,000. 

For example, let’s say your tax bill is $2,000, and you receive a tax credit for $2,000– you’d now owe $0. 

The type of tax credit matters—some are non-refundable, refundable, or partially refundable, and each plays by its own rules regarding whether a credit’s excess can roll over into the next year (i.e., for a $3,000 tax credit, apply $2,000 this year and $1,000 next year).

💰 Tax deductions, on the other hand, reduce your taxable income instead of giving you a 1:1 reduction in your taxes.

So, assume you have $20,000 worth of deductions and are at the 37% marginal tax rate– you’d knock $7,400 off your taxes ($20,000 * 37%). 

Though deductions aren’t as potent as tax credits, you tend to have more control over your deductions. 

🌊 However, before you get lost in a sea of receipts, just know you’ve got the standard deduction available—it's an easy, no-fuss option, set at a fixed deduction based on filing status. 

The standard deduction is $13,850 for singles and $27,700 for married filing jointly in 2023.

♠️ Tax credits are a game of learning and acting on what the government says you qualify for, whereas tax deductions are a game of knowing what business expenses you can legally claim.

💭 If you’re wondering what game you should focus on, it’s both.

For example, you may qualify for the Energy Efficient Home Improvement Credit, which offers up to $3,200, and the Electric Vehicle (EV) Tax Credit, which offers up to $7,500, for a total of $10,700 off your taxes dollar for dollar. 

The tax savings from the standard deduction of $13,850 (assume a 35% marginal tax rate) will chip off another $4,847.50– giving you a total of $15,547.50 saved– that’s a multi-month vacation in Europe. 

Now, you’re probably not going to buy a Tesla every year just to get a $7,500 credit, but you get the idea– there are plenty of credits high earners miss out on because they assume they don’t qualify. 

There are plenty of tailored tax credits for high-earners

Business owners tend to have way more tax deduction opportunities than W-2 employees, but salaried high-earners make plenty of deductions yearly.

Most credits target stimulating lower-to-middle income levels, but many are within reach for almost anybody. 

For tech professionals, the Lifetime Learning Credit offers up to $2,000 for further education. The Child and Dependent Care Credit provides up to $2,000 per child under 17, which is great for working parents. 

The Residential Clean Energy Credit can also net you up to 30% back on renewable energy investments like solar panels. 

And, of course, the electric vehicle tax credit, popularized by Tesla, where you can get up to $7,500 as a credit when buying a new EV or up to $4,000 for a used EV.  

As of this year, you can get this credit at the point of sale at some dealerships rather than waiting to claim it around tax time.

Here are a few of my favorites that don’t get as much attention as they probably should:

🏫 American Opportunity Tax Credit (AOTC): Supporting a college kid? Get up to $2,500 per student.

💡Research & Development Tax Credit: Innovators, claim your expenses!

🌎 Foreign Tax Credit: Working globally? Offset those foreign taxes.

🤝 Nonrefundable Credit for Prior Year Minimum Tax: AMT got you last year? Get it back!

Now, back to deductions.

❓️ Deductions– to standardize or itemize, that is the question

Itemizing makes sense if the sum of your tax deduction-applicable expenses, like mortgage interest or hefty state and local taxes (SALT), is more than the standardized deduction, which is $13,850 for single filers in 2023 or $27,700 for married filing. 

🏡For homeowners, the mortgage interest deduction applies to loans up to $750,000. 

❤️ Donations to approved charities are deductible, and for those in the tech sector, work-related education expenses can also reduce your taxable income.

🏥Health Savings Account (HSA) contributions can deduct up to $3,650 for individuals or $7,300 for families, providing a dual benefit of tax savings and healthcare funding. Substantial medical expenses (above 7.5% of your AGI) can also contribute to this number.

🧂SALT taxes in high-tax states can be claimed up to $10,000—which is already 70% of the standard deduction. 

You, or ideally your CPA, should ensure that your bookkeeping is bulletproof and that every business expense has substantial evidence supporting its use for business purposes. 

🤝  Making Cents of Tax Credits and Tax Deductions

I’m going to go out on a limb and assume you don’t want to spend a few dozen hours reading through IRS tax code updates every few months, which is why recruiting a financial planner with specific experience working with high earners is important. 

Tax credits change often, and new programs can emerge sporadically.  

Your journey through the tax strategy maze doesn't have to be a solo mission. 

Introduce your financial team to each other; your financial planner should work with your CPA to establish the following:

✅ what deductions you have at your disposal

✅ which credits you’re eligible for

✅ how to make strategic necessary purchases to offset your tax liability

✅ outline the implications that come with life’s big changes, such as marriage, taking on a mortgage, moving states, or taking on a new job with potential AMT exposure. 

✅ how an active tax planning strategy should be implemented during the tax year rather than within a few weeks of when the filings are due. 

Stay informed, stay strategic, and transform your newfound knowledge into tangible financial success. 

💼📈Here's to making every credit and deduction count! 

Until next week,

Dan from Tailored Cents