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Tax deductions and tax credits can be huge money-savers — if you know what they are, how they work and how to pursue them. Here's a cheat sheet.
What is a tax deduction?
A tax deduction lowers your taxable income and thus reduces your tax liability. You subtract the amount of the tax deduction from your income, making your taxable income lower. The lower your taxable income, the lower your tax bill.
What is a tax credit?
A tax credit is a dollar-for-dollar reduction in your actual tax bill. A few credits are refundable, which means if you owe $250 in taxes but qualify for a $1,000 credit, you’ll get a check for the difference of $750. (Most tax credits, however, aren’t refundable.)
As the simplified example in the table shows, a tax credit can make a much bigger dent in your tax bill than a tax deduction.
Would you rather have: | ||
A $10,000 tax deduction | …or a $10,000 tax credit? | |
Your AGI | $100,000 | $100,000 |
Minus tax deduction | ($10,000) | |
Taxable income | $90,000 | $100,000 |
Tax rate* | 25% | 25% |
Calculated tax | $22,500 | $25,000 |
Minus tax credit | ($10,000) | |
Your tax bill | $22,500 | $15,000 |
* Example rate. The U.S. has a progressive tax system. | ||
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How to claim tax deductions
Generally, there are two ways to claim tax deductions: Take the standard deduction or itemize deductions. You can’t do both.
The standard tax deduction for 2022 and 2023
The standard deduction basically is a flat-dollar, no-questions-asked reduction in your adjusted gross income (AGI). The amount you qualify for depends on your filing status. Here are the amounts for the 2022 tax year (taxes filed in 2023) and the 2023 tax year (taxes filed in 2024).
Filing status | 2022 tax year | 2023 tax year |
|---|---|---|
Single | $12,950. | $13,850. |
Married, filing jointly | $25,900. | $27,700. |
Married, filing separately | $12,950. | $13,850. |
Head of household | $19,400. | $20,800. |
People over age 65 or who are blind get a bigger standard deduction.
Itemizing deductions
Itemizing lets you cut your taxable income by taking any of the hundreds of available tax deductions you qualify for. The more you can deduct, the less you’ll pay in taxes.
Should you itemize or take the standard deduction?
Here’s what the choice boils down to:
If your standard deduction is less than the sum of your itemized deductions, you probably should itemize and save money. Beware, however, that itemizing usually takes more time, requires more forms and you'll need to have proof that you're entitled to the deductions.
If your standard deduction is more than the sum of your itemized deductions, it might be worth it to take the standard deduction (and the process is faster).
Note: The standard deduction has gone up significantly in recent years, so you might find that it's the better option for you now even if you've itemized in the past. Your tax software or tax advisor can run your return both ways to see which method produces a lower tax bill.
» MORE: Learn more about standard deductions and itemized deductions
20 popular tax deductions and tax credits
There are hundreds of deductions and credits out there. Here's a list of some common ones, as well as links to our other content that will help you learn more.
Child tax credit
This could get you up to $2,000 per child, with $1,500 of the credit being potentially refundable. (How it works.)
Child and dependent care tax credit
It’s meant to cover a percentage of day care and similar costs for a child under 13, a spouse or parent unable to care for themselves, or another dependent so you can work. Generally, it's up to 35% of $3,000 of expenses for one dependent or $6,000 for two or more dependents.
American opportunity tax credit
This lets you claim all of the first $2,000 you spent on tuition, books, equipment and school fees — but not living expenses or transportation — plus 25% of the next $2,000, for a total of $2,500. (How it works.)
Lifetime learning credit
You can claim 20% of the first $10,000 you paid toward tuition and fees, for a maximum of $2,000. Like the American opportunity tax credit, the lifetime learning credit doesn’t count living expenses or transportation as eligible expenses. You can claim books or supplies needed for coursework. (How it works.)
Student loan interest deduction
Deduct up to $2,500 from your taxable income if you paid interest on your student loans. (How it works.)
Adoption credit
This item covers up to $14,890 in adoption costs per child. The credit begins to incrementally decrease at certain income levels and completely phases once you reach a modified adjusted gross income of $263,410 or more.
Earned income tax credit
This credit can get you between $560 and $6,935 depending on how many kids you have, your marital status and how much you make. It’s something to explore if your AGI is less than about $59,000. (How it works.)
Charitable donations deduction
If you itemize, you may be able to subtract the value of your charitable gifts — whether they’re in cash or property, such as clothes or a car — from your taxable income. Per the IRS, you can generally deduct up to 60% of your adjusted gross income. (How it works.)
Medical expenses deduction
In general, you can deduct qualified, unreimbursed medical expenses that are more than 7.5% of your adjusted gross income for the tax year. (How it works.)
Deduction for state and local taxes
You may deduct up to $10,000 ($5,000 if married filing separately) for a combination of property taxes and either state and local income taxes or sales taxes. (How the property tax deduction and the sales tax deduction work.)
Mortgage interest deduction
The mortgage interest tax deduction is touted as a way to make homeownership more affordable. It cuts the federal income tax that qualifying homeowners pay by reducing their taxable income by the amount of mortgage interest they pay. (How it works.)
Gambling loss deduction
Gambling losses and expenses are deductible only to the extent of gambling winnings. So, spending $100 on lottery tickets isn’t deductible — unless you win, and report, at least $100, too. You can’t deduct more than the amount you win.
IRA contributions deduction
You may be able to deduct contributions to a traditional IRA, though how much you can deduct depends on whether you or your spouse is covered by a retirement plan at work and how much you make. (How it works.)
401(k) contributions deduction
The IRS doesn’t tax what you divert directly from your paycheck into a 401(k). In 2022, the contribution limit was $20,500 ($27,000 if you were 50 or older). These retirement accounts are usually sponsored by employers, although self-employed people can open their own 401(k)s. (How it works.)
Saver’s credit
This credit runs 10% to 50% of up to $2,000 ($4,000 if filing jointly) in contributions to an IRA, 401(k), 403(b) or certain other retirement plans. The percentage depends on your filing status and income. (How it works.)
Health savings account contributions deduction
Contributions to HSAs are tax-deductible, and the withdrawals are tax-free, too, as long as you use them for qualified medical expenses. (How it works.)
Self-employment expenses deduction
There are many valuable tax deductions for freelancers, contractors and other self-employed people. (How it works.)
Home office deduction
If you use part of your home regularly and exclusively for business-related activity, the IRS lets you write off associated rent, utilities, real estate taxes, repairs, maintenance and other related expenses. (How it works.)
Educator expenses deduction
If you’re a school teacher or other eligible educator, you can deduct up to $300 spent on classroom supplies in 2022.
Residential energy credit
This one can get you up to 30% of the installation cost of solar energy systems, including solar water heaters and solar panels. (Read more.)
Bonus: Electric vehicle tax credit
This nonrefundable tax credit ranges from $2,500 to $7500 for tax year 2022 and eligibility depends on the vehicle’s weight, the manufacturer, and whether you own the car. For tax year 2023 (taxes filed in 2024), the credit is greatly expanded and also includes used vehicles. (How it works.)