Are You Missing These 10 Tax Deductions?

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Welcome back to Ask Ralph – Christian Finance show, where we explore the intersection of faith and finances. As Proverbs 27:23-24 wisely advises, "Be sure you know the condition of your flocks, give careful attention to your herds; for riches do not endure forever, and a crown is not secure for all generations." This verse encourages us to be diligent in managing the resources God has entrusted to us. Today, we'll delve into three important topics that can help you maximize your savings and be a faithful steward of your finances. With that in mind, we ask—Are You Missing These 10 Tax Deductions?

1. What are 10 easy tax deductions and credits to cut your tax bill?
2. What is universal life insurance and why might it be a better option than a 401(k)?
3. What energy credits are available for 2024 tax filing and for 2025?

Check out the full podcast episode:

What Are 10 Easy Tax Deductions and Credits to Cut Your Tax Bill?

As Christians, we are called to be good stewards of our finances, and that includes being informed about legitimate ways to reduce our tax burden. Matthew 25:14-30 tells the parable of the talents, emphasizing the importance of wisely using what we are given. By understanding and utilizing tax deductions and credits, we can free up more resources to support our families, contribute to our communities, and further God's kingdom.

It's important to understand the difference between tax credits and tax deductions. Tax credits directly reduce the amount of taxes you owe, providing a dollar-for-dollar reduction of your tax liability. Tax deductions, on the other hand, lower your taxable income, which in turn reduces your tax liability¹.

Tax Deductions and Credits for 2024

Here are 10 common tax deductions and credits for the 2024 tax year:

1. Child Tax Credit (CTC). This credit provides up to $2,000 per qualifying child under 17. A family with two qualifying children could potentially reduce their tax bill by up to $4,000. The credit may be fully or partially refundable depending on your income¹.
2. Child and Dependent Care Credit (CDCC). If you have a child under 13, a spouse or parent who cannot care for themselves, or another dependent, this credit can help cover childcare expenses so you can work. It covers up to 35% of $3,000 in expenses for one dependent or $6,000 for two or more. For example, a family with one child in daycare could potentially receive a credit of up to $1,050 (35% of $3,000)².
3. American Opportunity Tax Credit (AOTC). Students or parents of students who haven't completed four years of post-secondary education can claim up to $2,500 for qualified educational expenses like tuition and textbooks. This credit is per student and can only be claimed once, meaning a family with two children in their first four years of college could claim up to $5,000¹.
4. Lifetime Learning Credit. This credit helps with the cost of undergraduate, graduate, and professional degree courses, as well as courses taken to improve job skills. You can claim 20% of the first $10,000 in educational expenses, up to $2,000. For example, if you spend $8,000 on eligible educational expenses, you could receive a $1,600 credit (20% of $8,000)².
5. Student Loan Interest Deduction. You can deduct up to $2,500 in interest paid on student loans. If you paid $3,000 in interest, you can deduct $2,500, reducing your taxable income by that amount¹.
6. Adoption Credit. This credit helps cover qualified adoption expenses, up to a maximum of $16,810 for 2024. The credit phases out at higher income levels².
7. Earned Income Tax Credit (EITC). This refundable credit is for low- and moderate-income workers. The amount varies based on income and number of children¹.
8. Charitable Donation Deduction. If you itemize deductions, you can deduct the value of cash or property donations to qualified charities².
9. Medical Expenses Deduction. You can deduct medical expenses exceeding 7.5% of your adjusted gross income. For example, if your adjusted gross income is $50,000, you can deduct medical expenses exceeding $3,750 (7.5% of $50,000)².
10. Deduction for State and Local Taxes (SALT). You can deduct up to $10,000 in state and local taxes, including property taxes and income or sales taxes².
11. Savers Tax Credit (STC). This often-overlooked credit allows you to claim a tax credit for contributions made to a qualifying retirement account, such as an IRA or 401(k). Depending on your adjusted gross income and filing status, you may receive up to $1,000. This credit can be claimed in addition to any deduction you may be eligible for on your retirement contributions¹.
12. EV Tax Credit. If you're considering purchasing an electric vehicle (EV) or fuel-cell electric vehicle (FCEV), you may be eligible for a non-refundable tax credit. The credit amount depends on whether you buy a new or used vehicle and whether it meets certain manufacturing and quality standards. For new vehicles, the credit can be up to $7,500, while for used vehicles, it's up to $4,000¹.

Additional Tax Deductions

In addition to those listed above, here are a few more deductions you might qualify for:

• Mortgage interest deduction: This allows homeowners to deduct the interest paid on their mortgage².
• IRA and 401(k) deductions: Contributions to traditional IRAs and 401(k)s may be deductible¹.
• Gambling loss deduction: You can deduct gambling losses up to the amount of your winnings².
• Bonus depreciation: This allows businesses to deduct a larger percentage of the cost of qualifying assets in the first year they are placed in service. However, this deduction is phasing out. For assets placed in service in 2024, the bonus depreciation deduction is limited to 60% of the cost. This percentage will continue to decrease each year until it reaches 0% in 2027³.

Tax Planning Strategies

Here are some strategies to help you maximize your tax savings:

• Maximize retirement contributions: Contribute as much as you can to tax-advantaged retirement accounts like 401(k)s and IRAs. This not only helps you save for the future but also reduces your current tax liability⁴.
• Bunching itemized deductions: If your itemized deductions are close to the standard deduction amount, consider bunching expenses into one year to exceed the standard deduction threshold and itemize. For example, you could prepay property taxes or medical expenses to maximize your deductions in a single year⁴.
• Leveraging charitable giving: If you plan to make charitable donations, consider donating appreciated assets you've held for at least one year. This allows you to deduct the fair market value of the asset, potentially avoiding capital gains taxes⁴.
• Qualified charitable distributions (QCDs): If you're over 70½, you can make tax-free charitable donations directly from your IRA. This can be a tax-efficient way to support your favorite charities while satisfying your required minimum distributions (RMDs)⁴.

Remember, tax laws are complex and subject to change. It's always a good idea to consult a tax professional for personalized advice on which deductions and credits you qualify for and how to optimize your tax strategy.

Tax Deductions and Credits for 2025

While many tax provisions remain the same from year to year, some key changes are coming in 2025. It's important to be aware of these changes to plan effectively.

• Standard Deduction: The standard deduction for 2025 is increasing. For single filers and married individuals filing separately, it rises to $15,000. For married couples filing jointly, it increases to $30,000, and for heads of households, it will be $22,500⁵.
• Retirement Plan Contribution Adjustments: The contribution limits for various retirement plans are also being adjusted for 2025. The annual contribution limit for employees who participate in 401(k), 403(b), and most governmental 457 plans increases to $23,500⁶.
  • The limit on annual contributions to a traditional or Roth IRA remains $7,000⁶.
  • Contribution limits for a simplified employee pension (SEP) IRA in 2025 are $70,000 or 25% of the employee's compensation, whichever is lower⁶.
  • Individuals with a SIMPLE IRA can contribute up to $16,500⁶.
• Catch-Up Contributions: The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), and most governmental 457 plans remains $7,500. However, a higher catch-up contribution limit applies to employees ages 60, 61, 62, and 63 who participate in these plans. For 2025, this higher catch-up contribution limit is $11,250. A higher catch-up contribution limit of $5,250 also applies for individuals ages 60-63 who contribute to a SIMPLE IRA⁶.

It's important to note that the Tax Cuts and Jobs Act is set to expire at the end of 2025. This means that some tax provisions may change after 2025⁶. It's crucial to stay informed and consult with a tax professional to ensure your financial plan is optimized for a healthy financial future.

What is Universal Life Insurance and Why Might It Be a Better Option Than a 401(k)?

Universal life (UL) insurance is a type of permanent life insurance that offers lifelong coverage and the potential to accumulate cash value. Unlike term life insurance, which provides coverage for a specific period, UL insurance is designed to last your entire life as long as you pay the premiums⁷. It also offers a cash value component that grows over time, providing a source of funds you can access while you're still living.

Types of Universal Life Insurance Policies

There are several types of universal life insurance policies, each with its own features and benefits:

• Traditional Universal Life Insurance: This is the most basic type of UL insurance. It offers flexible premiums and death benefits, and the cash value component earns interest at a rate set by the insurer. This interest rate may fluctuate based on market conditions but typically includes a guaranteed minimum rate⁷.
• Indexed Universal Life Insurance (IUL): With IUL insurance, the cash value growth is linked to the performance of a specific market index, such as the S&P 500. This offers the potential for higher returns than traditional UL insurance, but it also comes with more risk. However, IUL policies often have a floor, meaning your cash value won't decrease below a certain level, even if the market performs poorly⁷.
• Variable Universal Life Insurance (VUL): VUL insurance allows you to invest your cash value in various sub-accounts, similar to mutual funds. This gives you more control over your investments and the potential for higher returns, but it also carries a higher level of risk⁷.
• Guaranteed Universal Life Insurance (GUL): GUL insurance focuses on providing a guaranteed death benefit with lower premiums. It typically has minimal cash value growth compared to other types of UL insurance⁷.
• Variable Indexed Universal Life Insurance (VIUL): This is a hybrid product that combines features of IUL and VUL insurance. It allows you to allocate your cash value to both indexed accounts and variable sub-accounts, offering a balance between potential growth and risk⁷.

Why Universal Life Insurance Might Be a Better Option Than a 401(k)

While a 401(k) is a valuable retirement savings tool, universal life insurance, particularly IUL, offers several advantages that might make it a better option for some individuals:

• Tax-free income: With an IUL policy, you can access your cash value through tax-free loans or withdrawals, up to the amount of premiums paid. This can be a significant advantage in retirement, as it allows you to supplement your income without increasing your tax liability¹⁰.
• No contribution limits: Unlike 401(k)s, which have annual contribution limits set by the IRS, IULs allow you to contribute as much as you want. This can be beneficial for those who want to accelerate their cash value growth or have more flexibility in their savings strategy¹⁰.
• Death benefit: IULs provide a death benefit to your beneficiaries, which can be a valuable estate planning tool and provide financial security for your loved ones¹⁰.
• Market downside protection: Many IUL policies have a 0% floor, which means your cash value won't decrease due to market losses. This provides a level of protection that is not typically available with 401(k) investments¹⁰.
• No required minimum distributions (RMDs): Unlike 401(k)s, which require you to start taking distributions at a certain age, IULs have no RMDs. This gives you more control over your withdrawals and allows you to defer taxes on your cash value growth¹⁰.
• Flexibility: IULs offer flexibility in premium payments and death benefits, allowing you to adjust them as your needs change. This can be helpful if your income fluctuates or your financial goals evolve over time¹².
• Creditor protection: Depending on your state, IULs may offer creditor protection, meaning your cash value is protected from creditors in the event of a lawsuit or bankruptcy¹¹.
• Potential for higher returns: IULs can potentially offer higher returns than traditional fixed-income investments, such as bonds, while still providing some downside protection¹¹.

It's important to remember that the death benefit is paid out separately from the cash value. Both the death benefit and any remaining cash value go to your beneficiaries upon your death¹².

Ultimately, the best choice between universal life insurance and a 401(k) depends on your individual needs and financial goals. It's essential to carefully consider the pros and cons of each option and consult with a financial advisor to determine the best strategy for you.

What Energy Credits are Available for 2024 Tax Filing and for 2025?

The government offers tax credits to encourage energy efficiency and the use of renewable energy sources. These credits can help you save money while reducing your environmental impact. As Christians, we are called to be responsible stewards of God's creation, as instructed in Genesis 1:28: "God blessed them and said to them, 'Be fruitful and increase in number; fill the earth and subdue it. Rule over the fish in the sea and the birds in the sky and over every living creature that moves on the ground.'" By investing in energy-efficient technologies, we can help preserve the environment for future generations.

Energy Credits for 2024

For the 2024 tax year, you can claim the Energy Efficient Home Improvement Credit for various upgrades, including:

• Insulation and air sealing: 30% of costs, up to $1,200 annual limit¹⁴.
• Exterior doors: $250 per door, up to $500 total¹⁴.
• Windows and skylights: 30% of costs, up to $600 total¹⁴.
• Central air conditioners: 30% of costs, up to $600¹⁴.
• Heat pumps: 30% of costs, up to $2,000¹⁵.
• Heat pump water heaters: 30% of costs, up to $2,000¹⁵.
• Biomass stoves and boilers: 30% of costs, up to $2,000¹⁵.
• Home energy audits: $150¹⁴.

You can also claim the Residential Clean Energy Credit for:

• Solar electric property: 30% of costs¹⁴.
• Solar water heating property: 30% of costs¹⁴.
• Small wind energy property: 30% of costs¹⁴.
• Geothermal heat pumps: 30% of costs¹⁴.
• Battery storage technology: 30% of costs¹⁴.
• Fuel cell property: 30% of costs, up to $500 per half kilowatt of capacity¹⁴.

It's important to note that the Energy Efficient Home Improvement Credit is nonrefundable. This means that while it can reduce your tax liability to zero, you won't receive any excess credit as a refund¹⁵.

Energy Credits for 2025

The energy credits for 2025 are largely the same as for 2024, with some key changes:

• New requirements for air source heat pumps: Starting in 2025, air source heat pumps must meet new ENERGY STAR Most Efficient criteria to qualify for the credit. There are two pathways for eligibility: one for heating-dominated applications (ENERGY STAR Cold Climate designation) and one for cooling-dominated and dual-fuel applications¹⁶.
• Qualified manufacturer requirement: For each item of qualifying property placed in service, no credit will be allowed unless it was produced by a qualified manufacturer¹⁷.
• Elective pay option for tax-exempt entities: This option allows tax-exempt entities, including governments and nonprofits, to receive direct payments for clean energy projects, even if they don't have federal income tax liability¹⁸.
• Pre-filing registration: Governments and nonprofits need to register eligible projects with the IRS before claiming the credits¹⁹.
• Bonus credit opportunities: Bonus credits are available for projects located in energy communities and low-income communities, as well as for using equipment sourced from U.S.-based manufacturers¹⁹.

It's also important to be aware that the new administration may introduce changes to the energy tax credits in 2025¹⁹. Stay informed about potential updates and consult with a tax professional to ensure you're maximizing your savings.

How to Claim Energy Credits

To claim the energy credits, you'll need to file Form 5695, Residential Energy Credits, with your tax return¹⁵. Be sure to keep thorough records of your expenses, including receipts and invoices. It's also a good idea to speak with a tax advisor to determine your eligibility and ensure you're claiming the maximum credit amount.

Conclusion

As Christians, we are called to be faithful stewards of our resources and to care for God's creation. By understanding and utilizing tax deductions, credits, and other financial tools, we can honor God with our finances and make a positive impact on the world around us.

Today, we've explored several ways to manage your money wisely:

• Tax deductions and credits: We've looked at various tax benefits that can help you reduce your tax liability and free up resources for other purposes.
• Universal life insurance: We've discussed the features and benefits of universal life insurance, particularly IUL, and how it can be a valuable tool for both wealth accumulation and providing for your loved ones.
• Energy credits: We've explored the tax credits available for energy-efficient upgrades and renewable energy sources, which can help you save money and reduce your environmental impact.

Remember that these are just a few of the many financial tools available to you. It's crucial to seek professional advice and create a financial plan that aligns with your values, goals, and biblical principles. By doing so, you can experience financial freedom and use your resources to make a difference in the world.

Works cited

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