Top 10 Tax Breaks to Consider on Extended Returns

If you requested an extension for your 2023 federal income tax return, you have until six months from the original due date—October 15, 2024, to be exact—to wrap things up. This extra time may give you the opportunity to lower your overall tax bill and possibly increase a refund. Here are 10 potential tax breaks for individual taxpayers, including self-employed workers, to consider. 

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 the child tax credit for kids under age 17. On 2023 returns, the credit is $2,000 for each child if your modified adjusted gross income (MAGI) is $200,000 or less for single filers ($400,000 for couples who file jointly).

Dependent care credit. This credit is available if you incur qualified expenses so that you (and your spouse, if married) can work or actively look for work. It's generally 20% of the first $3,000 of expenses for one child ($6,000 for two or more children).

Adoption credit. For 2023, you can claim a maximum credit of $15,950 for qualified expenses incurred to adopt an eligible child. This credit is phased out for high-income taxpayers beginning at $239,230 of 2023 MAGI.

2. Charitable Gifts

If you donated money or property to qualified charities last year, you may be eligible for charitable deductions within generous limits. However, you must itemize deductions—rather than take the standard deduction—to claim charitable contributions.

The deduction for cash or cash-equivalents is limited to 60% of adjusted gross income (AGI). For gifts of property, a 30%-of-AGI threshold applies. However, there's an upside: If you donated appreciated property that you owned for longer than one year, the deduction is equal to its fair market value, not its cost.

To qualify for this itemized deduction, you must observe strict recordkeeping rules. Make sure you have the appropriate documentation to back up your claims.

3. Home Energy Credits

If certain requirements are met, you can claim the following nonrefundable tax credits for qualified residential energy-saving expenses on your 2023 return:

Energy-efficient home improvement credit. This credit is equal to 30% of the cost of energy-efficient installations—such as exterior doors, windows and skylights; insulation; and central air conditioning—up to a maximum limit of $1,200. Other special limits may apply to specific items.

Residential clean energy credit. For investments in energy improvements for your main home—including solar, wind, geothermal, fuel cells or battery storage equipment—you can claim a credit for 30% of the cost. The clean energy equipment must meet government standards.

4. QBI Deduction

The qualified business income (QBI) deduction may benefit self-employed individuals and owners of pass-through business entities, including S corporations, partnerships and limited liability companies (LLCs). The deduction is generally equal to 20% of the taxpayer's QBI, which is defined as the net amount of qualified items of income, gain, deduction and loss connected with the conduct of a U.S. business. However, QBI doesn't include certain investment items, reasonable compensation paid to an owner for services rendered to the business, or any guaranteed payments to a partner or LLC member treated as a partner for services rendered to the partnership or LLC.

Additional limits can begin to apply if taxable income for the year exceeds the applicable threshold. For 2023, the applicable threshold is $182,100 ($364,200 for married couples who file jointly).

One such limit is that the QBI deduction generally isn't available for income from "specified service businesses." This covers most people who provide personal services to the public, ranging from physicians to plumbers and pest control experts. (However, engineers and architects are specifically exempt from the special limitation.)

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. For example, if you have two kids in college, the maximum credit is $5,000 per year.

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.

The AOTC is generally preferable to the LLC if you have more than one child. 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

An owner of commercial or investment real estate can exchange like-kind properties without paying any current tax, except to the extent any "boot" is received. For example, you might have sold an apartment building in 2023 in return for a warehouse or raw land, without owing tax on the gain from the sale on your 2023 return. But to qualify for the favorable tax treatment, you must meet the following timing requirements:

• 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 of 180 days or your tax return due date, plus extensions, for the tax year of the transfer.

So, filing an extension may have provided you with 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 to have the appropriate documentation to support your claims.

8. Home Office Deductions

If you're self-employed, you may qualify for home office deductions. To qualify for this break, you must regularly and exclusively use part of your home as your principal place of business or a place where you normally deal with patients, customers or clients. You may even qualify if you do the books at home and your main "work" occurs at other sites. For example, a landscaper or an interior designer may be eligible for this deduction.

Generally, you can deduct your direct home office expenses, plus a portion of your indirect expenses for the entire home based on the percentage of business use of the home. Examples of indirect expenses are utilities, mortgage interest, property taxes, repairs and insurance premiums. Alternatively, you can elect a simplified method using $5 per square foot of office space up to a maximum of $1,500.

Important: Under the current tax rules, employees aren't allowed to claim the home office deduction, even if their employers require them to work remotely. The Tax Cuts and Jobs Act suspended miscellaneous itemized deductions, including unreimbursed employee business expenses, through 2025.

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 own 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 can't be claimed for passenger vehicles costing more than $55,000, or $80,000 for vans, sports utility vehicles and pickup trucks. For the first time ever, purchasers of used EVs may qualify for a credit of up to $4,000, limited to 30% of the cost. But lessors still can't claim any credit.

To qualify, the vehicle must be powered by batteries made with materials that are sourced from the United States or one of its free trade partners. Partial credits may be allowed. While the prior threshold of 200,000 vehicles per manufacturer has been repealed, the vehicle still must appear on the IRS approved list.

10. Installment Sales

Under the installment sale method, you can defer tax on the sale of real estate if you receive payments over two or more years. Briefly stated, the tax that's due from any gain is proportional to the income received for the tax year—though ordinary gain from certain depreciation recapture is recognized in the year of sale, even if no cash is received.

This tax treatment is automatic. However, once you've reviewed your situation, you may find that it's beneficial to pay all the tax in 2023. For instance, you may have incurred a substantial loss from your S corporation to absorb the taxable income. Or you might expect to be subject to higher tax rates in future years. In those situations, you may elect out of installment sale treatment by the tax filing extension date.

Ready, Set, File

The October 15 deadline for filing extended 2023 returns will be here before you know it. Contact your SSB tax advisor to discuss your options and to file a timely return. These 10 breaks are just the tip of the iceberg. Your SSB tax pro may suggest additional ideas for ways to lower your tax obligation for the last tax year and beyond.  

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