Deductions and credits are the primary tools for reducing your tax burden. Understanding the difference — and knowing which ones you qualify for — can save significant money.
How Deductions Work
A deduction reduces your taxable income. The tax savings depend on your marginal tax rate. For example, a $1,000 deduction saves $220 for someone in the 22% bracket but $370 for someone in the 37% bracket.
Common Itemized Deductions
State and local taxes (SALT) — property taxes and either state income tax or sales tax, capped at $10,000 combined
Mortgage interest — on acquisition debt up to $750,000 (for mortgages taken after December 15, 2017)
Charitable contributions — donations to qualified organizations (cash, property, appreciated stock); subject to AGI limitations
Medical and dental expenses — amounts exceeding 7.5% of AGI
Casualty and theft losses — only from federally declared disasters
Above-the-Line Deductions
These are subtracted from gross income to arrive at AGI, benefiting all taxpayers regardless of whether they itemize:
Traditional IRA contributions (if eligible)
Student loan interest (up to $2,500)
HSA contributions
Self-employment tax (deduct half)
Alimony payments (for agreements before 2019)
How Credits Work
A credit directly reduces your tax liability. A $1,000 credit saves $1,000 regardless of your tax bracket — making credits more valuable than deductions of the same amount.
Important Tax Credits
Earned Income Tax Credit (EITC) — a refundable credit for low- to moderate-income workers; amount depends on income, filing status, and number of qualifying children
Child Tax Credit — up to $2,000 per qualifying child under 17; partially refundable
American Opportunity Credit — up to $2,500 per student for the first four years of college; 40% refundable
Lifetime Learning Credit — up to $2,000 per return for education expenses (not limited to four years)
Child and Dependent Care Credit — for expenses paid for the care of qualifying children or dependents while you work
Saver's Credit — for low- to moderate-income taxpayers who contribute to retirement accounts
Premium Tax Credit — subsidizes health insurance premiums for marketplace coverage
Strategic Tax Planning
Bunch deductions — concentrate deductible expenses in one year to exceed the standard deduction
Time capital gains — hold investments for more than one year to qualify for lower long-term capital gains rates
Maximize retirement contributions — reduce taxable income while building savings
Harvest tax losses — sell losing investments to offset gains