In:if you understand what they are, how they work and how to apply for them, tax deductions and: tax credits can save you a ton of money.
yours taxable income reduced by a tax deduction that lowers your total tax burden. Your taxable income is reduced as a result of the withdrawal tax deduction of your earnings. Your tax liability decreases as your taxable income decreases.
a tax credit reduces your real tax liability dollar for dollar. Some credits are refundable, so if your tax liability is $250 but you qualify for a $1,000 credit, you’ll get a check for the $750 shortfall.
a tax credit has the potential to reduce your tax liability significantly more than a tax deduction, as the simplified example in the table shows.
There are several credits and deductions. Here’s a drop-down list of some typical ones, along with links to our other articles so you can learn more.
Child tax credit
For the 2022 tax year, this is up to $2,000 per child, and $1,500 of the credit is refundable.
Child and dependent care tax credit
For a spouse or parent who is unable to care for themselves, a child under 13, or another dependent, it is planned to pay part of the day care and related costs while you are at work. Typically, this is up to 35% of expenses, which are $3,000 for one dependent or $6,000 for two or more.
American Opportunity Tax Credit
This allows you to deduct the first $2,000 you spend on tuition, books, supplies, and school fees, as well as 25% of the next $2,000, for a total deduction of $2,500. However, living and transportation costs are not eligible.
Lifetime Learning Credit
With a maximum of $2,000, you can deduct 20% of the first $10,000 you spend on tuition and fees. The Lifetime Learning Credit does not count living expenses or transportation as allowable expenses, as does the American Opportunity Tax Credit. Books or other supplies may be required for courses.
Student loan interest deduction
If you paid interest on your student loans, you can deduct up to $2,500 from your taxable income.
This item pays up to $14,890 in adoption expenses per child for the 2022 tax year. Once you reach a modified adjusted gross income of $263,410 or more, the benefit stops completely and begins to gradually decrease at certain income levels.
Deduction for charitable donations
If you itemize, you can deduct the value of your charitable contributions from your taxable income, whether they’re made in cash or in kind, such as clothing or a car. You can usually deduct up to 60% of your adjusted gross income, according to the IRS.
Reducing medical expenses
Generally, eligible, unreimbursed medical expenses that exceed 7.5% of your adjusted gross income for the tax year are deductible.
State and local tax deduction
You’re allowed a deduction of up to $10,000 ($5,000 if you’re married and filing separately) for a combination of property taxes plus state and local income or sales taxes.
Deducting mortgage interest
The mortgage interest tax deduction is promoted as a way to reduce the cost of home ownership. It reduces the amount of federal income tax that eligible homeowners must pay by deducting the amount of mortgage interest from their taxable income.
Reducing gambling losses
Only gambling winnings are deducted for gambling losses and expenses. Therefore, buying $100 worth of lottery tickets is not deductible unless you also win $100 and report it. More deductions than won are prohibited.
Deducting IRA contributions
You may be eligible to deduct traditional IRA contributions, but the amount you can deduct is based on your income and whether you or your spouse are covered by a workplace retirement plan.
401(k) contribution deduction
What you contribute directly to a 401(k) from your paycheck is not taxed by the IRS (k). The maximum donation in 2022 will be $20,500 ($27,000 if you’re 50 or older). Although self-employed individuals are allowed to set up their own 401(k), these retirement plans are usually sponsored by employers.
This credit ranges from 10% to 50% of contributions made to an IRA, 401(k), 403(b) or certain other retirement plans up to $2,000 ($4,000 if filing jointly). Depending on your registration status and income, the percentage will vary.
Health Savings Account Investment Deduction
HSA contributions are tax-deductible, and withdrawals are also tax-free as long as they are used for eligible medical expenses. If you only have high-deductible health insurance for the 2022 tax year, the contribution limit for individual coverage is $3,650. For families with high-deductible health plans, the contribution threshold is $7,300.
Reducing self-employment costs
There are many valuable tax deductions for freelancers, contractors, and other independent contractors.
Home office deduction
The IRS allows you to deduct related rent, utilities, property taxes, repairs, maintenance and other related expenses if you use part of your home frequently and exclusively for business-related activities.
Reducing teacher costs
For tax year 2022, teachers and other qualified educators can write off up to $300 of classroom supplies.
Residential energy credit
Installation costs of solar energy systems such as solar water heaters and solar panels can be reduced by up to 30% with this system.
Electric vehicle tax credit
Eligibility for this nonrefundable tax credit for the 2022 tax year ranges from $2,500 to $7,500 and is based on the vehicle’s weight, manufacturer, and ownership. The credit has been significantly increased for the 2023 tax year (taxes filed in 2024) and now also includes used cars.