3 IRS Deductions You Can't Take This Year, Experts Warn
YOU'LL WANT TO KEEP THESE IN MIND BEFORE YOU FILE THIS SEASON.
Whether you like it or not, tax season is here. The Internal Revenue Service (IRS) started accepting filings on Jan. 23 for any early birds. For the rest of us, the deadline is April 18—but before you file, you'll want to be aware of any changes for the 2023 tax season. Experts warn that there are a few key deductions you can't take this year—which could affect what your tax refund adds up to. Read on to find out the latest tax updates.
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Out-of-pocket charitable donations
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The first deduction to get the boot is out-of-pocket charitable donations, Andy Kalmon, CEO of employee stock purchase plan (ESPP) website Benny, tells Best Life.
During the COVID-19 pandemic, the IRS permitted a standard deduction from gross income for donations to qualified charities—without requiring taxpayers to itemize donations. The flat amount, also known as an "above-the-line deduction" was set at $300 per individual and $600 per married couple filing jointly. However, it's not an option on your 2022 return.
Now, you need to itemize your donations in order to write them off, but as Forbes notes, the majority of Americans don't itemize their donations. This means that your refund could be smaller, even if you did give some clothing away to a good cause.
Another eliminated deduction is related to moving expenses—which you can't claim even if you had to move for job-related reasons, according to Dana Ronald, president of Tax Crisis Institute. Only active members of the Armed Forces moving due to military order are permitted to take this deduction, per the IRS.
This policy isn't new this year—the deduction hasn't been available since 2018, Janet Patterson, loan and finance expert at Highway Title Loans, says. But you'll want to get used to this change, as it's not scheduled to expire until Dec. 2025, at least for now.
"These changes were made as part of the Tax Cuts and Jobs Act (TCJA)," Patterson explains. "The bill [passed in 2017] aimed to simplify tax filing, lower tax rates, and raise the standard deduction. However, the changes to the tax code have been controversial, and the availability of certain deductions may change in the future."
Patterson adds that without this deduction, your taxable income may be higher, thus increasing your tax responsibility. "However, the effect on your overall tax return will depend on your specific circumstances," she notes.
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The IRS also did away from alimony as a deduction under the TCJA. According to the IRS website, alimony payments for divorce or separation agreements dated after Dec. 31, 2018, cannot be deducted. This means they aren't deductible for the payer and don't count as taxable income for the recipient.
Like moving expenses, experts said this change was made to make the tax filing process a bit easier.
"The IRS mainly eliminated these deductions to simplify the tax filing process and reduce confusion about which deductions people can take on their returns," Ronald says. "The IRS also believes that eliminating these deductions will increase compliance with the tax code and reduce the likelihood of errors when filing taxes."
There's also a significant change to tax credits.
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Not as many changes were made to deductions for tax year 2022, but there are a few updates to tax credits, which are worth mentioning. Credits differ from deductions: According to the IRS, deductions reduce your taxable income before you calculate what you owe, whereas credits reduce the amount of taxes you owe or increase your refund.
This year, the IRS reduced the child and dependent care tax credit from $8,000 to $2,100, Spencer Reese, CEO of Military Money Manual, tells Best Life. This is in line with the maximum amount before the pandemic.
"The increase in the tax credit was from the American Rescue Plan Act," he says, citing the 2021 act, also known as the COVID-19 Stimulus Package. "But now that we're out of the pandemic and in a working economy, there is no need for it. So the IRS reduced the credit back to pre-pandemic amounts."
The child tax credit (CTC) is also smaller, according to the IRS, now at a maximum of $2,000 for each child. For 2021, the credit amount for those under age six was $3,600, and for those under 18, it was $3,000.
Finally, the earned income tax credit (EITC) is getting a makeover, after being expanded in 2021 to help lower-income Americans who don't have children. This year, the max credit amount for those with no children is $560, compared with $1,502 for 2021.
Best Life offers the most up-to-date financial information from top experts and the latest news and research, but our content is not meant to be a substitute for professional guidance. When it comes to the money you're spending, saving, or investing, always consult your financial advisor directly.