By Daniel Korleski, MBA
Most of us just want to make it through tax season without any surprises. When it’s time to file, many people stick to the basics, applying the standard deductions and credits they know.
But what if I told you there are tax breaks you might be missing that could lighten your burden? Here are some lesser-known deductions and credits that could make a big difference in your financial plan.
Tax Deductibles vs. Tax Credits
Tax deductions reduce the amount of taxable income you incur before taxes are assessed. With the right deductions, you could potentially move into a lower tax bracket.
By contrast, tax credits apply after your liability has been calculated, reducing your overall tax bill. Credits are based on income, expenses, and other factors. Every credit dollar reduces your tax bill by the same amount.
Wealthy, high-income taxpayers may benefit more from deductions, while lower-income families may earn more from credits. Shrewd taxpayers take advantage of both.
State and Local Tax Deductions
The breaks most taxpayers ignore involve the imposition of state sales taxes. With the wild variance of tax laws from state to state, it’s easy to see how they get missed. However, they can add up.
States Without Income Tax
Taxpayers in states without income tax may be able to deduct major purchases up to the limits outlined by the IRS. Alternatively, they can track their sales tax incurred last year and base their deductions on those.
States With Income Tax
Taxpayers in states like Colorado that charge income tax also must choose between those two structures (income vs. sales taxes). However, the income tax option is usually best. You can deduct up to $10,000 (or $5,000 for married couples filing separately) of combined property taxes and income or sales taxes.
Individual and Home-Based Tax Deductions and Credits
Many of the best opportunities for saving on taxes are centered around life and home. The following are some of the more overlooked or forgotten breaks.
Mortgage Interest Reduction
Qualified homeowners who itemize their deductions can cut their taxable income by deducting interest payments on their existing mortgages. Portions of the premium payments may also be deductible.
Renewable Energy Credits
Homeowners switching to renewable energy sources can write off certain expenses. You may be able to take up to 30% of the installation costs for installing solar panels, water heaters, or HVAC systems. You may also get a non-refundable credit for a new electric vehicle if it meets IRS guidelines. Credit amounts in 2023 ranged from $3,750 to $7,500.
Saver’s Credit
The saver’s credit helps low-to-medium-income taxpayers contribute to an IRA, 401(k), 403(b), and certain other retirement funds. The credit runs between 10% and 50% of up to $2,000 for each individual.
Charitable Contributions
If you itemize your deductions or donate to a charity via certain approved strategies then you may be able to deduct the total from your taxable income.
Education Deductions
The IRS facilitates continuing education with several learning tax credits:
American Opportunity Tax Credits
Students can claim the first $2,000 spent on approved educational expenses, such as tuition, books, and school fees.
Lifetime Learning Credit
The lifetime learning credit helps post-graduates continue their education. They can claim 20% of the first $10,000 spent on expenses, to a maximum of $2,000.
Student Loan Interest
Taxpayers repaying their student loans can deduct the amount they paid in interest over the last year. The maximum you can claim in 2024 is $2,500.
Business Tax Deductions
Business owners and self-employed individuals have numerous options for reducing their tax bills.
Self-Employed Expense Deductions
Self-employed individuals can write off select expenses, such as continuing education, retirement savings, mileage reimbursement, and certain kinds of health insurance. Those working out of residences may qualify for home-office deductions as well.
Small Business Owner Tax Deductions
Some of the most helpful deductions for small business owners include:
- Qualified business income deductions
- Research and development tax credits
- Family and medical leave credit
- Employee retention credits
- Section 179 expenses, such as equipment and machinery
Check with your accountant to verify that you’re taking advantage of all applicable breaks.
Healthcare and Medical Deductions
You might qualify for certain expenses related to healthcare and medicine, including the following.
Medical Expense Deductions
If you itemize deductions, you may qualify to have certain medical expenses subtracted from your taxable income. Expenses must surpass 7.5% of your adjusted growth income.
HSA Contribution Deductions
If you’ve opened a health savings account (HSA), your contributions to the fund may be deductible.
Discover Additional Overlooked Deductions and Credits
These are some of the most commonly overlooked tax deductions, credits, and breaks available to individuals in Colorado, though there may be others that apply to your unique situation.
To arrange a free consultation with our team at Cobalt Private Wealth to review your financial planning or investment concerns and determine if our services align with your needs, reach out to me at danielkorleski@cobaltprivatewealth.com or 719-332-3863 to schedule a meeting.
About Dan
Daniel Korleski is the President & CEO for Cobalt Private Wealth, where he helps his clients grow, manage, and protect their wealth so they can work toward a stronger financial future. With over 30 years of experience in the financial services industry, Dan has served as the managing director for Investment Trust Company, chief investment officer for the Wealth Management Group at American National Bank in Denver, and regional investment manager for the Greater Colorado Region of the Private Bank at Wells Fargo, where he oversaw the management of over $2 billion. In 2008, he was appointed by the mayor of Colorado Springs to the City’s Investment Advisory Committee. Dan holds an MBA in investment management from Midwestern State University in Wichita Falls, Texas, a Bachelor of Science in Finance from Florida State University, and is a member of both the CFA Society Colorado and The Financial Planning Association.
Dan loves to give of his time to his community and is currently serving as the Board Chair of Catholic Charities of Central Colorado and oversees the Homebound Ministry at St. Paul Catholic Church. He has also served as Chair of the Board of Trustees of Pikes Peak Hospice Foundation, President of the Broadmoor Rotary Club, and Vice President of the Board for the Pikes Peak Chapter of Trout Unlimited. Dan was born and raised in Spain and is fluent in Spanish. To learn more about Dan, connect with him on LinkedIn.
