The information in this article is up to date for tax year 2024 (returns filed in 2025).
Want to save a lot of money on your taxes? Taking some time to familiarize yourself with available tax credits and deductions can help you save thousands of dollars on your tax return. Both tax credits and deductions play a key role in reducing what you owe, but they work differently. Tax deductions decrease your taxable income, which in turn can reduce your federal income tax liability. While tax credits give you a dollar-for-dollar reduction on your tax bill. Here are some of the most valuable tax breaks available this season and how to determine if you qualify.
Understanding Tax Deductions and Credits
Taxes might seem confusing, but once you understand the difference between tax deductions and credits, you’ll be off to a great start! Both are essential tools for reducing your tax liability, but they work in distinct ways. A tax deduction lowers your taxable income, which in turn reduces the amount of income tax you owe. On the other hand, a tax credit provides a direct reduction in your tax bill, dollar for dollar.
Tax deductions come in two main types: above-the-line and below-the-line. Above-the-line deductions are subtracted from your gross income to determine your adjusted gross income (AGI). Examples include contributions to retirement accounts and student loan interest. Below-the-line deductions, also known as itemized deductions, are subtracted from your AGI to calculate your taxable income. Common itemized deductions include mortgage interest, charitable donations, and medical expenses.
Tax credits are even more straightforward. They directly reduce the amount of tax you owe. Some credits, like the earned income tax credit (EITC) and the child tax credit, can provide substantial tax savings. These credits can be either refundable or non-refundable. Refundable credits can reduce your tax bill to below zero, resulting in a refund, while non-refundable credits can only reduce your tax bill to zero.
Understanding these differences can help you make informed decisions and maximize your tax savings.
Child Tax Credit
Studies show that it costs parents over $200,000 to raise a child to 18 years old. The kicker is that figure doesn’t even include the cost of sending them to college. Fortunately, the Child Tax Credit can help put some cash back in your wallet. The credit is worth $2,000 per child aged 16 or younger and up to $1,700 is refundable. Even if you are not required to pay federal income taxes, you may still qualify for a refund through the Earned Income Tax Credit.
Child and Dependent Care Credit
Did you pay someone to take care of your kids or dependent with disabilities so you could go to work? If the answer is yes, you may be able to claim the Child and Dependent Care Credit. The credit gives you back a percentage of what you spent on care expenses. To qualify for the credit, the person must be:
A child aged 12 or younger.
A spouse who is unable to care for themselves and lived with you at least half of the year.
Any other person who is unable to care for themselves, lived with you at least half of the year and could be claimed as a dependent on your tax return.
The Child and Dependent Care Credit is worth 20% to 35% of your care expenses. You can claim up to $3,000 of expenses for one person or $6,000 for two or more people.
Earned Income Tax Credit (EITC)
The Earned Income Tax Credit was designed to give workers with low to moderate incomes (particularly those with children) a financial boost. For tax year 2024, the credit is worth up $7,830. However, the maximum you can receive is $632 if you don’t have any children. Four out of five eligible taxpayers claim the EITC. Don’t be the one who misses out. File your taxes with ezTaxReturn and we’ll guide you step-by-step to the tax credits and deductions you deserve. Get the biggest possible refund, guaranteed. Even if you do not owe any taxes, the EITC can result in a refund, making it essential to file your return even if you don’t have to pay taxes.
Saver’s Credit
Saving for retirement? There’s a tax credit for that. The Saver’s Credit is a special tax break for low and moderate-income workers who make contributions to a retirement account. Depending on your adjusted gross income (AGI) and filing status, you can get 50%, 20% or 10% of the first $2,000 you save. In other words, the credit is potentially worth up to $1,000, $400 or $200.
American Opportunity Tax Credit
Going to college is a huge financial decision. Tuition is expensive and the major you choose can dictate how much money you will earn in the future. Claiming an education credit can help ease the financial burden. If you paid for tuition, books and other supplies, you may qualify for the American Opportunity Tax Credit (AOTC). This can save you up to $2,500 on your taxes. The best part is if the credit reduces your tax bill to zero, you can receive the remaining credit (up to $1,000) as a refund. Students can only claim the AOTC during their first four years of college and you must be enrolled at least part-time for a semester.
Lifetime Learning Credit
Whether you’re pursuing a degree or taking courses to enhance your job skills, you may be eligible for the Lifetime Learning Credit. It is worth up to $2,000 per tax return. Unlike the AOTC, there is no limit on the number of years the credit can be claimed.
Student Loan Interest Deduction
Many Americans take out student loans to pursue their college degree and end up graduating with significant debt. If you’re currently paying back student loans, you may be able to deduct up to $2,500 of paid interest on your tax return. You’ll automatically receive a Form 1098-E, Student Loan Interest Statement from your school if you pay more than $600 in interest for the year.
Educator Expenses Deduction
Teachers tend to go above and beyond to ensure their students have everything they need. This often means dipping into their own pockets for supplies. If you haven’t already been reimbursed for your purchases, you may be able to get your money back when you file your taxes. Educators can deduct up to $300 ($600 for married couples if both parties are educators). Qualified expenses include books, supplies, computer equipment and fees paid to attend professional development courses.
Charitable Donations and Tax Deductions
Giving back to your community not only feels good but can also be good for your tax bill. Charitable donations to qualified 501(c)(3) organizations are tax-deductible, meaning they can reduce your taxable income and, consequently, your tax liability.
Donations can be in the form of cash, goods, or even services. The amount you can deduct depends on the type and value of your donation. For instance, if you donate household items, their fair market value is deductible. Always keep receipts and documentation to substantiate your contributions.
Another savvy way to give and save is by donating your required minimum distribution (RMD) from your retirement account to a qualified charity. This can help lower your taxable income and reduce your tax liability, making it a win-win for both you and the charity.
Medical and Dental Expenses Deduction
If you itemize, you can deduct the portion of your medical and dental bills that exceeds 7.5% of your adjusted gross income. You can deduct fees paid to your doctor or dentist, the cost of prescription glasses, hearing aids, transportation to appointments and things of that nature. However, funeral and burial costs are nondeductible as well as most cosmetic surgeries. Additionally, contributions to a Health Savings Account (HSA) are tax-deductible, and withdrawals for qualified medical expenses are tax-free.
Mortgage Interest Deduction
Homeowners can save a lot of money on their taxes by claiming the mortgage interest deduction. The amount you can claim depends on when you purchased the property. Longtime homeowners can deduct the interest paid on mortgages up to $1 million ($500,000 if married filing separately). Meanwhile, those who bought their home after December 15, 2017, can only deduct the interest paid on mortgages up to $750,000 ($375,000 if married filing separately).
Home Office Deduction
If you’ve spent the last year working from home, you may be wondering if you can deduct any of the expenses. The answer is probably no. Under the Tax Cuts and Jobs Act (TCJA), an employee’s home office expenses are nondeductible. However, you can claim the home office deduction if you’re self-employed and use the space regularly and exclusively for business. If your office also serves as a guest room or play area, you cannot claim the deduction.
Self-Employment and Business Tax Deductions
Being your own boss comes with its perks, including a variety of tax deductions that can significantly lower your taxable income. If you’re self-employed or own a small business, you can deduct many business-related expenses, reducing your overall tax liability.
Common deductions include the business use of your home and car, travel expenses, and costs for equipment and supplies. For instance, if you use part of your home exclusively for business, you may qualify for the home office deduction. Similarly, if you use your car for business purposes, you can deduct mileage or actual expenses.
In addition to these deductions, self-employed individuals can also benefit from tax credits like the earned income tax credit (EITC) and the child tax credit. These credits provide a direct reduction in the amount of tax you owe, offering substantial tax savings.
State and Local Taxes and Your Tax Bill
State and local taxes (SALT) can take a significant bite out of your income, but the good news is that you can deduct these taxes from your federal taxable income. The SALT deduction allows you to deduct state and local income taxes, sales taxes, or property taxes, up to a limit of $10,000 per year.
This deduction can be a valuable tool for reducing your federal tax liability. Additionally, many states and local governments offer their own tax credits and deductions for specific expenses like education, child care, and home improvements. These local incentives can further reduce your tax bill and provide significant tax savings.
By understanding and leveraging these deductions and credits, you can make informed decisions about your tax strategy and minimize your tax liability.
Ready to maximize your refund? File with ezTaxReturn today and get your biggest possible refund, guaranteed!
The articles and content published on this blog are provided for informational purposes only. The information presented is not intended to be, and should not be taken as, legal, financial, or professional advice. Readers are advised to seek appropriate professional guidance and conduct their own due diligence before making any decisions based on the information provided.
