Tax deductions and credits help reduce the amount of tax owed, but they work differently. Here's a guide to popular deductions, credits, and how they can benefit you.

1. Key Differences: Tax Deductions vs. Tax Credits

• Tax Deductions: Reduce taxable income.
• Example: A $1,000 deduction lowers taxable income by $1,000, saving you money based on your tax bracket.
• Tax Credits: Directly reduce your tax bill.
• Example: A $1,000 credit reduces your tax bill by $1,000.

2. 22 Popular Tax Deductions and Credits

• Child Tax Credit
• Up to $2,000 per child under 17.

• $1,600 is refundable.

• Child and Dependent Care Credit

• Covers up to 35% of $3,000–$6,000 in childcare or dependent care costs.

• American Opportunity Tax Credit (AOTC)

• Up to $2,500 for tuition, books, and fees.

• Lifetime Learning Credit (LLC)

• Claim 20% of tuition/fees, up to $2,000 per return.

• Student Loan Interest Deduction

• Deduct up to $2,500 in student loan interest.

• Adoption Credit

• Covers up to $15,950 per child for adoption expenses.

• Earned Income Tax Credit (EITC)

• Refundable credit ranging from $600 to $7,430, based on income and dependents.

• Charitable Donation Deduction

• Deduct qualifying donations, up to 60% of AGI.

• Medical Expenses Deduction

• Deduct unreimbursed expenses exceeding 7.5% of AGI.

• State and Local Taxes (SALT)

  • Deduct up to $10,000 for property taxes plus state/local income or sales tax.

• Mortgage Interest Deduction

  • Deduct interest paid on mortgages.

• Gambling Loss Deduction

  • Deduct losses up to gambling winnings.

• Traditional IRA Contributions

  • Deductible based on income and retirement plan coverage.

• 401(k) Contributions

  • Contributions to traditional 401(k) plans are tax-deductible.

• Saver’s Credit

  • 10%–50% of up to $2,000 in retirement savings ($4,000 for joint filers).

• Health Savings Account (HSA) Contributions

  • Tax-deductible contributions for qualified medical expenses.

• Self-Employment Tax Deduction

  • Deduct 50% of self-employment taxes.

• Home Office Deduction

  • Deduct a portion of rent, utilities, and other home expenses if used exclusively for business.

• Educator Expenses Deduction

  • Deduct up to $300 for classroom supplies (up to $600 for couples).

• Solar Tax Credit

  • Covers 30% of solar installation costs.

• Energy-Efficient Home Improvement Credit

  • Credit of up to $3,200 for qualifying upgrades like windows, doors, or heat pumps.

• Electric Vehicle (EV) Tax Credit

  • Up to $7,500 for new EVs or $4,000 for used EVs, depending on income and vehicle.

3. How Tax Deductions and Write-Offs Work

• Above-the-Line Deductions: Adjust gross income (AGI).

• Example: HSA or IRA contributions, student loan interest.

• Below-the-Line Deductions: Subtracted from AGI to calculate taxable income.

• Example: Itemized deductions like medical expenses or mortgage interest.

4. Standard Deduction vs. Itemized Deductions

• Standard Deduction:
• Single: $13,850
• Married Filing Jointly: $27,700

• Over 65 or blind: Additional amount applies.

• Itemized Deductions: Choose if total exceeds the standard deduction.

• Example: Combining medical, charitable, and SALT deductions.

5. How to Claim Deductions

• Step 1: Gather receipts and documentation for eligible expenses.
• Step 2: Determine whether to take the standard deduction or itemize.
• Step 3: Use tax software or consult a tax professional to calculate the most advantageous option.

Pro Tip: Tax credits often provide greater savings than deductions—maximize credits where possible!

Bottom Line

Understanding the range of available deductions and credits can help reduce your tax burden significantly. Evaluate your financial situation, collect the necessary documentation, and consult tax resources or professionals to ensure you’re taking full advantage of these opportunities.

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