“Your Guide to Tax Deductions and Credits: 17 Ways to Save on Your Tax Bill”

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17 Popular Tax Deductions and Credits

The IRS expects you to report all of your income on your tax return, but you don’t necessarily have to pay taxes on every dollar. Tax deductions and credits reduce your tax liability by cutting your taxable income or lowering your tax bill dollar for dollar. Need inspiration? Here are 17 common tax write-offs you can use to save money on your next tax bill.

1. Mortgage Interest Deduction

All or part of the interest you pay on your mortgage may be tax deductible. The mortgage interest deduction only applies to the first $750,000 in mortgage debt on your primary or second residence. You can deduct interest from a mortgage or home equity loan, but the loan must be used to buy, build or substantially improve your property, not for debt consolidation or spending.

2. State and Local Taxes

You may deduct up to $10,000 of taxes paid to state, local, and foreign governments ($5,000 if you’re married filing separately). Eligible taxes include:

• State, local, and foreign income taxes
• State and local general sales taxes that are in lieu of state and local income taxes
• State and local property taxes
• State and local personal property taxes

3. Charity Donation Deduction

Both cash and noncash charitable donations are tax deductible, but be sure to follow IRS guidelines that determine which charities qualify, how to value noncash donations, how to document your donations, and more. Check with your tax pro or IRS Publication 526 for help figuring your deduction.

4. Medical Expense Deduction

Out-of-pocket health care expenses that exceed 7.5% of your adjusted gross income for the year may be tax deductible. A wide range of expenses are eligible, from health insurance premiums and insurance copays to dental care and alternative treatments like acupuncture. Payments that are reimbursed by insurance or paid for from a health savings account (HSA) or flexible spending account (FSA) don’t count.

5. Disaster, Casualty, and Theft Loss Deduction

If your property is damaged, destroyed, or lost in a federally declared disaster, a portion of your loss may be tax deductible. Likewise, you may be able to claim a loss for stolen property. In either case, you can’t include losses that have been reimbursed by insurance, and the IRS places limits on the amount of loss you can claim. Check the IRS site or talk to your tax pro for detailed information.

6. Self-Employment Expense Deductions

Contractors, gig workers, and self-employed people who report business income on their tax returns may deduct business expenses including equipment, supplies, health insurance premiums, home office expenses, and more. Self-employed people may also deduct half of their self-employment tax from their taxable income.

7. Adjustments to Income

The self-employment tax deduction is one of many adjustments to income that reduce your income before accounting for any itemized or standard deductions. Deductible contributions to traditional individual retirement accounts (IRAs) and HSAs, alimony you’ve paid, student loan interest, and educator expenses are just a few examples of the adjustments to income shown on Schedule 1 of Form 1040.

8. Child Tax Credit

You may qualify for a child tax credit of up to $2,000 per child, stepchild, eligible foster child, sibling, stepsibling, half-sibling, grandchild, niece, or nephew age 17 or younger who qualifies as a dependent on your tax return. To receive the full credit, your income must be $200,000 or less ($400,000 or less if filing jointly). An IRS interactive tax assistant can help you determine whether you qualify for this credit. Up to $1,500 of the child tax credit may be refundable if you also claim the additional child tax credit. Dependents who do not meet the criteria for qualifying children may be eligible for a $500 credit for other dependents.

9. Child and Dependent Care Tax Credit

If you pay for child or dependent care so you can work or look for work, you may be eligible for a child and dependent care tax credit of 20% to 35% of your care expenses. The credit tops out at $3,000 worth of care for a single dependent or $6,000 for two or more dependents, for a maximum credit of $1,050 for one or $2,100 for multiple dependents. Multiple income and eligibility requirements apply.

10. American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) lets you deduct up to $2,500 in qualified college expenses for an eligible student in their first four years of higher education. To claim the full credit, your marginal adjusted gross income must be less than $80,000 if you’re single or $160,000 if married filing jointly.

11. Lifetime Learning Credit

Claim a credit of up to $2,000 per tax return for eligible expenses related to undergraduate, graduate, and professional degree courses, including courses you take to sharpen your own job skills. The credit is equal to 20% of the first $10,000 in qualified education expenses. It’s subject to income limitations that are similar to the AOTC.

12. Earned Income Tax Credit

The earned income tax credit (EITC) allows working people and families with limited incomes to lower their tax bills with a tax credit based on income, filing status, and the number of qualifying children you have. For the 2023 tax year, the maximum credit was $7,430 for families with three or more qualifying children, earning a maximum income of $56,838 ($63,398 for married couples filing jointly). Check your eligibility for the EITC using an IRS online tool.

13. Saver’s Credit

The Credit for Qualified Retirement Savings, or saver’s credit, offers an incentive for low- and moderate-income taxpayers to save for retirement in IRAs, 401(k)s, and other workplace retirement plans. The maximum credit is $1,000 ($2,000 for married couples), calculated as a percentage of the first $2,000 you contribute ($4,000 if you’re married).

14. Energy Efficient Home Improvement Credit

Claim a tax credit of up to $3,200 for qualified energy efficiency improvements, residential energy property expenses, and home energy audits. The credit is for 30% of expenses you incur for qualified improvements installed in 2023 or later.

15. Residential Clean Energy Tax Credit

If you install renewable energy equipment at your home between now and 2032, you may be eligible to claim a credit for 30% of your costs for solar, wind, geothermal, fuel cell, or battery storage technology under the residential clean energy tax credit.

16. Clean Vehicle Tax Credits

You can claim a tax credit of up to $7,500 when you purchase a qualifying new electric vehicle (EV) or fuel cell electric vehicle (FCEV), or up to $4,000 when you buy an eligible used EV or FCEV. Not all clean energy vehicles meet criteria for the credit: Check with the U.S. Department of Energy for a full list of qualifying new and used vehicles. You must also meet income and eligibility requirements to claim these credits.

What Are Tax Deductions?

Tax deductions are qualifying expenses, charity donations, or losses the IRS allows you to subtract to reduce your taxable income and lower your tax bill. Tax deductions may be itemized individually on your tax return.

What Is the Standard Deduction?

The standard deduction is an alternative to listing out and claiming individual deductions. To claim the standard deduction, you match the standard deduction to your tax filing status (single, head of household, married filing jointly, or married filing separately) and deduct the standardized amount on Form 1040.

Most taxpayers claim the standard deduction instead of itemizing. If the standard deduction for your filing status is greater than your itemized deductions combined, it’s the wiser choice. As an added benefit, you don’t need to save receipts or tally up expenses to claim the standard deduction: The full amount is available to you automatically.

Tax Credit vs. Tax Deduction

A tax deduction reduces your tax liability by subtracting certain expenses or losses from your taxable income. Less taxable income translates to a lower tax bill. If your income is $90,000 and you have $20,000 in deductions, your taxable income is $70,000. A single taxpayer with $70,000 in taxable income is in the 22% tax bracket, which means a $20,000 deduction would save roughly $4,400 in taxes.

Tax credits lower your tax bill dollar for dollar. A $20,000 tax credit reduces your tax bill by $20,000, which means a $20,000 tax credit saves you more money than a $20,000 tax deduction. Also keep in mind that you don’t have to choose between tax credits and deductions; you can (and should) claim both as long as you’re eligible.

How Do You Claim Tax Deductions?

Tax preparation software typically automates this process for you: You’ll answer a series of questions, and the software will complete the appropriate forms for your return. If you’re filing a paper return (or prefer to see your options on paper), use IRS Form 1040 as your starting point. Here’s how to claim tax deductions:

• Claim adjustments to income, including IRA and HSA contributions, educator expenses, and student loan interest, on Schedule 1.
• Itemize deductions on Schedule A. You’ll need to document your deductible expenses and may need to submit additional forms.
• Choose the standard deduction (if you aren’t itemizing) on line 12, Form 1040. If you claim the standard deduction, you can still claim adjustments to income and tax credits; however, you can’t itemize.

The Bottom Line

These are some of the most popular tax deductions and credits, but they are by no means the full list. See Schedule A and Schedule 1 for a quick survey of tax deductions and adjustments to income, or check IRS Publication 529 for a more complete explanation of tax deductions. If you want more help, tax preparation software can guide you, or ask a seasoned tax preparer to point you toward money-saving deductions and credits.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you with all your mortgage needs!

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