INSIGHTS 10 Key Breaks for 2023 Federal Returns on Extension

If you filed for an extension on your 2023 federal income tax return, the clock is ticking—October 15, 2024, is the final deadline. While this extension offers you additional time, it also provides a valuable opportunity to explore ways to potentially reduce your tax bill and, in some cases, increase your refund. Below are 10 tax breaks individual taxpayers, including those who are self-employed, should consider before submitting their returns.

1. Family Tax Credits

Families may be eligible for several tax breaks under current tax law. Common examples are:

• Child Tax Credit: Parents can claim $2,000 per child under 17, provided their modified adjusted gross income (MAGI) is $200,000 or less for single filers ($400,000 for joint filers).
• Dependent Care Credit: This credit allows you to claim 20% of up to $3,000 in child care expenses for one child ($6,000 for two or more) if the expenses enable you (and your spouse, if married) to work or seek work.
• Adoption Credit: For 2023, adoptive parents can claim up to $15,950 in tax credits for qualified adoption expenses. The credit begins to phase out for higher-income taxpayers, starting at a MAGI of $239,230.2. Charitable Gifts

2. Charitable Gifts

You could be eligible for a charitable deduction if you donated to qualified charities last year, but only if you itemize your deductions. Cash donations can be deducted up to 60% of your adjusted gross income (AGI), while property donations are capped at 30% of AGI. A key benefit is that appreciated property held for over a year can be deducted at fair market value. Just be sure to follow strict recordkeeping rules and have the necessary documentation to support your claims.

3. Home Energy Credits

You can claim nonrefundable tax credits for qualified residential energy-saving expenses on your 2023 return if you meet specific requirements.

The energy-efficient home improvement credit offers 30% of the cost for eligible installations, such as exterior doors, windows, insulation, and central air conditioning, up to a maximum of $1,200. Some items may have their special limits.

The residential clean energy credit covers 30% of the cost for energy improvements like solar panels, wind turbines, geothermal systems, fuel cells, or battery storage equipment for your primary home, as long as the equipment meets government standards.

4. QBI Deduction

The qualified business income (QBI) deduction can significantly benefit self-employed individuals and owners of pass-through business entities, including S corporations, partnerships, and LLCs. Generally, this deduction equals 20% of the taxpayer's QBI, which is the net amount of qualified income, gain, deduction, and loss related to the operation of a U.S. business. However, it’s important to note that QBI doesn’t include certain investment income, reasonable compensation paid to an owner for services, or guaranteed payments to a partner or LLC member. For 2023, the QBI deduction is subject to additional limits if your taxable income exceeds $182,100 ($364,200 for married couples filing jointly). These limits may reduce or eliminate the deduction depending on the nature of the business and the taxpayer’s income level. A significant restriction is that the QBI deduction isn’t available for income from "specified service businesses," including many personal services providers such as doctors, lawyers, and consultants. However, engineers and architects are specifically exempt from this limitation, allowing them to fully benefit from the deduction even if their income exceeds the threshold.

5. Higher Education Credits

Eligible parents can generally claim one of the following higher education credits for their children in school:

American Opportunity Tax Credit (AOTC). The maximum AOTC is $2,500 per student or $5,000 per year if you have two kids in college.

Lifetime Learning Credit (LLC). The maximum LLC is $2,000 per family. So, if you have two kids in college, the maximum credit is limited to $2,000 per year. If you have more than one child, the AOTC is generally preferable to the LLC. However, unlike the AOTC, the LLC is available for more than four years of study.

Important: Both credits are phased out based on MAGI. For 2023, the phaseout ranges are:

• $80,000 to $90,000 for single taxpayers and heads of households, and
• $160,000 to $180,000 for married couples who file jointly.

Married couples who file separately aren't eligible for either credit.

6. Section 1031 Like-Kind Exchanges

A commercial or investment real estate owner can exchange like-kind properties without immediate tax liability, except for any "boot" received. For example, if you sold an apartment building in 2023 and acquired a warehouse or land, you wouldn't owe taxes on the gain. However, specific timing requirements must be met to qualify for this tax deferral.

• The replacement property must be identified or received within 45 days of transferring legal ownership of the relinquished property and
• The title to the replacement property must be transferred to you within the earlier 180 days of your tax return due date, plus extensions for the tax year of the transfer.

So, filing an extension may have given you extra time to complete a tax-deferred exchange.

7. Medical Deductions

Taxpayers who itemize may deduct unreimbursed medical expenses above 7.5% of AGI. For instance, if you incurred $10,000 in qualified medical expenses in 2023 and your AGI is $100,000, you can write off $2,500 of your medical expenses ($10,000 minus 7.5% of $100,000). Filing for an extension gives you additional time to check for deductible expenses that may have fallen through the cracks. Unearthing extra expenses may help you exceed the threshold for 2023, but you'll need the appropriate documentation to support your claims.

8. Home Office Deductions

If you're self-employed, you may qualify for home office deductions if you regularly and exclusively use part of your home as your principal place of business or where you meet with clients. This deduction is available even if your primary work occurs elsewhere, such as for a landscaper or interior designer. Generally, you can deduct direct home office expenses and a portion of indirect expenses for the entire home, like utilities, mortgage interest, property taxes, repairs, and insurance premiums, based on the percentage of business use. Alternatively, you can choose the simplified method, which allows a deduction of $5 per square foot of office space up to $1,500. It's important to note that under current tax laws, employees cannot claim the home office deduction, even if their employers require them to work remotely.

9. EV Credits

Starting in 2023, the tax credit for purchasing new electric vehicles (EVs) and hybrids for domestic use is revised. Under the Inflation Reduction Act, the credit may be up to $7,500. To qualify for the credit under the updated guidance, you must:

• Buy it for your personal use, not for resale, and
• Use it primarily in the United States.

In addition, your MAGI can't exceed:

• $300,000 for married couples filing jointly,
• $225,000 for heads of households, or
• $150,000 for all other filers.

The credit isn't available for passenger vehicles costing over $55,000 or vans, SUVs, and pickup trucks over $80,000. For the first time, buyers of used EVs may qualify for a credit of up to $4,000, limited to 30% of the vehicle's cost, though lessors are still ineligible for any credit. To qualify, the vehicle must be powered by batteries made with materials sourced from the U.S. or its free trade partners, and partial credits may be allowed. Although the previous 200,000-vehicle cap per manufacturer has been repealed, the vehicle must still be on the IRS-approved list.

10. Installment Sales

Under the installment sale method, you can defer taxes on the sale of real estate if you receive payments over multiple years. The tax due on any gain is proportional to the income received each year, though certain depreciation recapture gains are taxed in the year of sale, even if no cash is received. While this tax treatment is automatic, depending on your situation, it might be beneficial to pay all the taxes in 2023. For example, if you have a substantial loss from your S corporation to offset the taxable income or expect to be in a higher tax bracket later, you might choose to opt out of the installment sale treatment by the tax filing extension date. The October 15 deadline will arrive faster than you think. Don't wait until the last minute—consult a Reynolds + Rowella tax advisor today to explore your options and ensure a timely, accurate filing. These 10 tax breaks are just the beginning; our tax professionals can help you uncover additional opportunities to minimize your tax liability for the 2023 tax year and beyond.

Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve. Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.