Understanding Taxes and Exemptions: Your Tax Season Guide

Tax time rolls around once a year in January, but how much do you really know about taxes and exemptions? Nearly all U.S. citizens and businesses have to pay taxes to the Internal Revenue Service (IRS) each year.

With new legislation in place, changes have been made to standard deductions as well as exemptions. Let’s look at how this new law might impact the way you file.

How much tax you’re charged depends on your overall income (before tax), also called your Adjusted Gross Income (AGI). The 2017 Tax Cuts and Jobs Act made changes to the percentage of tax charged per income bracket. How much you’re charged will also depend on whether you’re filing independently or jointly.

Below are the current tax rates per income bracket.

If filing individually (single income):

• $10,275 or less: 10%
• $10,276 - $41,775: 12%
• $41,776 - $89,075: 22%
• $89,076 - $170,050: 24%
• $170,051 - $215,950: 32%
• $215,951 - $539,900: 35%
• $539,901 and higher: 37%

If filing jointly (married couples):

• $20,550 or less: 10%
• $20,551 - $83,550: 12%
• $83,551 - $178,150: 22%
• $178,151 - $340,100: 24%
• $340,101 - $431,900: 32%
• $431,901 - $647,850: 35%
• $647,851 and higher: 37%

Tax deductions reduce your taxable income, which can reduce the amount you’ll pay in taxes each year. Tax credits, on the other hand, directly reduce the amount of taxes you owe at a dollar-for-dollar amount.

As an example, let’s look at a $10,000 tax deduction versus a $10,000 tax credit on an income of $75,000. (Please note, this is a simple example designed to help you understand the difference between deductions and credits.)

As you can see, it often pays to opt for tax credits over deductions, when possible. While both will save you money on your tax bill, credits of the same amount often save you more than deductions.

There are two ways to claim deductions on your taxes. You can opt for a standard, flat-rate deduction,determined by income, or you can itemize your deductions to potentially maximize your savings.

You have to choose one deduction option. The standard deduction is much faster, but the itemized deduction could be more beneficial.

Your accountant or tax software can walk you through all available deductions and help you determine whether the standard or itemized deductions will save you more money. If you’re filing on your own, you’ll need to do the research independently, though you can use the below deductions resources to help.

Your standard deduction depends on how you file your taxes. Seniors 65 and older also receive larger deductions.

Here are the standard deductions for your 2022 and 2023 tax returns:

Itemizing your deductions allows you to see if you qualify for any number of the hundreds of deductions the government offers. Going through each deduction can be time-consuming and typically requires more effort and paperwork. However, if you’re looking to maximize your refund or minimize the amount owed, you can benefit by itemizing your deductions.

Self-employed filers, for instance, typically save more money on taxes owed by itemizing their deductions and business expenses.

A few popular itemized deductions include:

• Medical and dental costs that exceed 7.5% of your AGI
• State and local taxes paid, up to $10,000
• State and local real estate taxes
• Home mortgage interest
• Gifts to charity (see IRS publication 526 for details)
• Student loan interest paid, up to $2,500

You can find the full list of deductions, criteria, and limits on the IRS’s website.

Since you can save more money with tax credits, it’s important to review any credits you might be eligible for. Like deductions, your accountant or tax preparation software will walk you through any eligible credits. If you’re filing independently, we’ll show you some of the main tax credits to look into.

• The Child Tax Credit
  
  If you have children or dependents under the age of 17 living in your household, who receive financial support from you, you can claim the Child Tax Credit (CTC). As of 2022, this credit offers you as much as $2,000 per child, and $1,500 of that credit may be refundable.
  
  To claim the full CTC, you’ll need to meet the IRS income criteria. After a certain income amount, you’ll only be eligible for partial credit. Those who exceed set amounts may not be eligible for this credit at all. Here’s a breakdown of the credit by income and filing status:

• Child and Dependent Care Credit
  
  If you have kids or dependents under the age of 13, another popular credit is the Child and Dependent Care Credit. This offers you money back on child care expenses like babysitting and daycare.
  
  To qualify for the credit, the child or dependent must meet one of the below:

• The child or dependent was under 13 during the time of care.
• The dependent is a spouse who was physically or mentally unable to care for themselves and lived with you for at least six months.
• The person in question was physically or mentally unable to care for themselves, lived with you for more than six months, and is your dependent or could have been your dependent (except they earned more than $4,200 independently).
  
  The amount you can claim depends on your AGI and ranges from 35% down to 20%. If you made $15,000 or less, you can claim 35% of your child or dependent care expenses. From here, the percentage drops by 1% for every additional $2,000 you make. Once you reach $43,000 AGI, you’ll max out at 20% of these costs.
  
  You’ll receive up to $3,000 for one child and $6,000 for two or more or the percentage (whichever is less).

• Earned Income Tax Credit
  
  The Earned Income Tax Credit (EITC) helps lower taxes for individuals in lower-income brackets. The amount you can earn depends upon your filing status, AIG, and the number of children or dependents you claim.
  
  Here are the credit amounts for EITC for 2022:

There are a wide variety of tax credits available to explore. A few additional popular tax credits include:

• The Retirement Contribution Savings Credit for 401k, Roth IRA, SEP, and other retirement contributions
• The American Opportunity Tax Credit (AOTC) for income-restricted, full-time college taxpayers
• The Lifetime Learning Credit (LLC) for taxpayer students pursuing a degree, certificate, or credential
• Electric Vehicle Credit for taxpayers with qualifying plug-in electric vehicles
• Federal Adoption Tax Credit for taxpayers who adopted a child under 18 or dependent in the tax year being filed

Self-employed individuals are eligible for additional tax credits based on job expenses and the typical costs of doing business.

You can find a full list of credits available online through the IRS.

Now that you understand more about taxes, how they’re calculated, and how to file, you can submit your 2022 taxes with confidence. Be sure to gather all of your tax paperwork and look through any deductions or credits you might qualify for.

Partnering with an accountant or using tax preparation software can help guide you through the tax preparation process, so you can feel secure in the data you’re submitting. If you understand your tax information well, you can file for free, then submit your returns and any payments through the mail.

Don’t let taxes stress you out this tax season – use this guide to help you understand all of the complicated jargon and make the best tax preparation decision for your situation.