Learn More About Tax Deductions and Credits

Tax deductions and credits are two ways to reduce your tax bill. Deductions lower your taxable income, while credits reduce your tax liability directly.

Tax deductions

Tax deductions reduce your taxable income, which means you pay less income tax. There are two types of tax deductions: above-the-line deductions and itemized deductions.

• Above-the-line deductions are taken directly from your adjusted gross income (AGI). This means that you can claim them even if you don’t itemize your deductions. Some examples of above-the-line deductions include student loan interest, deductible IRA contributions, and self-employment taxes.
• Itemized deductions are taken from your AGI if they exceed the standard deduction. The standard deduction is a set amount of money that the IRS allows you to deduct from your income without having to itemize your deductions. Some examples of itemized deductions include medical expenses, state and local taxes, and charitable contributions.

Tax credits

Tax credits reduce your tax liability directly. This means that they can reduce the amount of tax you owe dollar-for-dollar. There are many different types of tax credits available, including:

• Earned Income Tax Credit (EITC): The EITC is a refundable tax credit for low- and moderate-income workers. It can provide up to $6,935 in tax relief for eligible taxpayers.
• Child Tax Credit (CTC): The CTC provides a tax credit of up to $2,000 per child under the age of 17. The credit is phased out for higher-income taxpayers.
• American Opportunity Tax Credit (AOTC): The AOTC provides a tax credit of up to $2,500 per year for qualified education expenses.
• Lifetime Learning Credit (LLC): The LLC provides a tax credit of up to $2,000 per year for qualified education expenses.

How to claim tax deductions and credits

To claim tax deductions and credits, you must file a tax return with the IRS. You can use Form 1040 to file your tax return.

• To claim above-the-line deductions, you will need to complete Schedule A of Form 1040.
• To claim itemized deductions, you will need to complete Schedule A of Form 1040 and attach it to your tax return.
• To claim tax credits, you will need to complete Form 1040 and attach any required schedules.

Tips for maximizing your tax deductions and credits

Here are a few tips for maximizing your tax deductions and credits:

• Keep good records of your expenses. This will help you to substantiate your deductions and credits when you file your tax return.
• Review the IRS website for information on the latest tax deductions and credits. The IRS publishes a variety of publications that can help you to understand the tax laws and how to claim deductions and credits.
• Consider working with a tax professional. A tax professional can help you to identify all of the tax deductions and credits that you are eligible for and to complete your tax return accurately.

Conclusion

Tax deductions and credits can offer significant tax savings. By understanding the different types of deductions and credits that are available and how to claim them, you can reduce your tax bill and save money.