- Understand the difference between deductions and credits
- Know when to itemize vs take the standard deduction
- Learn common tax deductions and credits
- Understand above-the-line vs below-the-line deductions
Deductions vs Credits: The Key Difference
Both reduce your taxes, but in very different ways:
Tax Deductions
Reduce your taxable income
If you're in the 22% bracket, a $1,000 deduction saves you $220 in taxes.
Value = Deduction × Your Tax Rate
Tax Credits
Reduce your actual tax bill dollar-for-dollar
A $1,000 credit saves you exactly $1,000 in taxes, regardless of bracket.
Value = Credit Amount (always)
Standard Deduction vs Itemizing
Everyone can take either the standard deduction OR itemize their deductions (list them out). You should take whichever is larger.
Standard Deduction (Check Current Year)
| Single | $14,600 |
| Married Filing Jointly | $29,200 |
| Head of Household | $21,900 |
| 65+ or Blind | Additional $1,550-$1,950 |
Amounts change annually - check the current IRS limits.
Most people take the standard deduction because it's simple and, since the 2017 tax reform increased it significantly, it's larger than most people's itemized deductions.
When to Itemize
Itemize if your total deductible expenses exceed the standard deduction. Common itemized deductions:
- Mortgage interest (often the biggest one)
- State and local taxes (SALT) - capped at $10,000
- Charitable donations
- Medical expenses over 7.5% of AGI
Common Tax Deductions
Above-the-Line Deductions (Available to Everyone)
These reduce your Adjusted Gross Income (AGI) even if you take the standard deduction:
-
Traditional IRA contributions: Up to $7,000 ($8,000 if 50+)
Income limits apply if you have a workplace retirement plan
-
HSA contributions: Check current IRS limits for individual and family caps
Must have a high-deductible health plan
-
Student loan interest: Up to $2,500
Income limits apply
- Self-employment tax: Deduct half of what you pay
- Educator expenses: $300 for teachers
Below-the-Line (Itemized) Deductions
- Mortgage interest: On loans up to $750,000
-
State and local taxes (SALT): Up to $10,000
Includes property tax, state income or sales tax
- Charitable donations: Up to 60% of AGI
- Medical expenses: Portion exceeding 7.5% of AGI
Common Tax Credits
Child Tax Credit
- Up to $2,000 per qualifying child under 17
- $1,700 is refundable (you get it even if you owe no tax)
- Income limits: phases out above $200k single, $400k married
Earned Income Tax Credit (EITC)
- For low-to-moderate income workers
- Up to the current-year maximum with 3+ qualifying children (check IRS)
- Fully refundable - can result in a refund
- Often missed by eligible taxpayers - check if you qualify!
Saver's Credit
- Credit for contributing to retirement accounts
- 10%, 20%, or 50% of contributions up to $2,000
- For lower-income taxpayers (AGI under the current-year threshold)
Education Credits
- American Opportunity Credit: Up to $2,500/year for first 4 years of college
- Lifetime Learning Credit: Up to $2,000/year for any higher education
- Can't claim both for the same student in the same year
Energy Credits
- Electric Vehicle Credit: Up to $7,500 for new EVs
- Energy Efficient Home Credit: For solar panels, heat pumps, etc.
Refundable vs Non-Refundable Credits
Non-Refundable
Can only reduce your tax to $0. If the credit is larger than your tax bill, you don't get the excess.
Example: Child & Dependent Care Credit
Refundable
If the credit exceeds your tax bill, you get the difference as a refund.
Example: EITC, part of Child Tax Credit