Tax deductions and tax credits can be huge money-savers — if you know what they are, how they work and how to pursue them. Here’s a cheat sheet.
What is a tax deduction?
A tax deduction is a dollar amount that the IRS allows you to subtract from your adjusted gross income, or AGI, making your taxable income lower. The lower your taxable income, the lower your tax bill.
What is a tax credit, then?
A tax credit is a dollar-for-dollar reduction in your actual tax bill. A few credits are refundable, which means if you owe $250 in taxes but qualify for a $1,000 credit, you’ll get a check for the difference of $750. (Most tax credits, however, aren’t refundable.)
As the simplified example in the table shows, a tax credit can make a much bigger dent in your tax bill than a tax deduction.
| * Example rate only. The United States uses a progressive tax system. | ||
|---|---|---|
| A $10,000 tax deduction… | …or a $10,000 tax credit? | |
| Your AGI | $100,000 | $100,000 |
| Less: tax deduction | ($10,000) | |
| Taxable income | $90,000 | $100,000 |
| Tax rate* | 25% | 25% |
| Calculated tax | $22,500 | $25,000 |
| Less: tax credit | ($10,000) | |
| Your tax bill | $22,500 | $15,000 |
How to claim tax deductions
Generally, there are two ways to claim tax deductions: Take the standard deduction or itemize deductions. You can’t do both.
The standard deduction
The standard deduction basically is a flat-dollar, no-questions-asked reduction in your AGI. The amount you qualify for depends on your filing status.
| Filing status | 2018 tax year | 2019 tax year |
|---|---|---|
| Single | $12,000 | $12,200 |
| Married, filing jointly | $24,000 | $24,400 |
| Married, filing separately | $12,000 | $12,200 |
| Head of household | $18,000 | $18,350 |
People over age 65 or who are blind get a bigger standard deduction.
Itemizing deductions
Itemizing lets you cut your taxable income by taking any of the hundreds of available tax deductions you qualify for. The more you can deduct, the less you’ll pay in taxes.
Should you itemize or take the standard deduction?
Here’s what the choice boils down to:
- If your standard deduction is less than the sum of your itemized deductions, you probably should itemize and save money. Beware, however, that itemizing usually takes more time, requires more forms and you’ll need to have proof that you’re entitled to the deductions.
- If your standard deduction is more than the sum of your itemized deductions, it might be worth it to take the standard deduction (and the process is faster).
Note: The standard deduction went up significantly in 2018, so you might find that it’s the better option for you now even if you’ve itemized in the past.
Your QuikTax™ tax professional can run your return both ways to see which method produces a lower tax bill.
20 Popular deductions and credits for Individuals
Deduct up to $2,500 from your taxable income if you paid interest on your student loans.
This lets you claim all of the first $2,000 you spent on tuition, books, equipment and school fees — but not living expenses or transportation — plus 25% of the next $2,000, for a total of $2,500
You can claim 20% of the first $10,000 you paid toward tuition and fees in 2019, for a maximum of $2,000. Like the American Opportunity Tax Credit, the Lifetime Learning Credit doesn’t count living expenses or transportation as eligible expenses. You can claim books or supplies needed for coursework.
It’s typically 20% to 35% of up to $3,000 of day care and similar costs for a child under 13, an incapacitated spouse or parent, or another dependent so you can work — and up to $6,000 of expenses for two or more dependents
This could get you up to $2,000 per child and $500 for a non-child dependent.
For the 2019 tax year, this item covers up to $14080 in adoption costs per child.
This credit can get you between $529 and $6,557 in 2019 depending on how many kids you have, your marital status and how much you make. It’s something to explore if your AGI is less than about $56,000
If you itemize, you may be able to subtract the value of your charitable gifts — whether they’re in cash or property, such as clothes or a car — from your taxable income.
You can deduct qualified, unreimbursed medical expenses that are more than 10% of your adjusted gross income for the tax year.
You may deduct up to $10,000 ($5,000 if married filing separately) for a combination of property taxes and either state and local income taxes or sales taxes.
The mortgage interest tax deduction is touted as a way to make home ownership more affordable. It cuts the federal income tax that qualifying homeowners pay by reducing their taxable income by the amount of mortgage interest they pay.
Gambling losses and expenses are deductible only to the extent of gambling winnings. So, spending $100 on lottery tickets isn’t deductible — unless you win, and report, at least $100, too. You can’t deduct more than the amount you win.
You may be able to deduct contributions to a traditional IRA, though how much you can deduct depends on whether you or your spouse is covered by a retirement plan at work and how much you make.
The IRS doesn’t tax what you divert directly from your paycheck into a 401(k). In 2019, those limits are $19,000 and $25,000 if you are 50 or over. These retirement accounts are usually sponsored by employers, although self-employed people can open their own 401(k)s
This runs 10% to 50% of up to $2,000 in contributions to an IRA, 401(k), 403(b) or certain other retirement plans ($4,000 if filing jointly). The percentage depends on your filing status and income.
Contributions to HSAs are tax-deductible, and the withdrawals are tax-free, too, as long as you use them for qualified medical expenses. For 2019, if you have self-only high-deductible health coverage, you can contribute up to $3,500. If you have family high-deductible coverage, you can contribute up to $7,000 in 2019.
There are many valuable tax deductions for freelancers, contractors and other self-employed people
If you use part of your home regularly and exclusively for business-related activity, the IRS lets you write off associated rent, utilities, real estate taxes, repairs, maintenance and other related expenses
If you’re a school teacher or other eligible educator, you can deduct up to $250 spent on classroom supplies.
This one can get you up to 30% of the installation cost of solar energy systems, including solar water heaters and solar panels.