Reduce Your Taxes: 15 Common Tax Credits and Deductions
Tax credits and deductions are two of the few bright spots during tax time since they reduce the amount of taxes you have to pay. Tax credits are an amount you can deduct, dollar for dollar to reduce the amount of taxes you owe. Tax deductions lower your taxable income, which then lowers your taxes. Navigating deductions and credits can be a little tricky so it can be a good idea to consult a tax professional if you’re unsure about which are right for you (a credit, a deduction or both, if eligible). If you use a tax prep software, it usually has a narrative of questions up front to help determine what you’re eligible for, and possibly which choices will mean paying the least amount of taxes. If you’re going at it alone, well… may the odds be ever in your favor.
To get you started, here are 15 of the most common credits and deductions (excluding the standard deduction) to help you better understand what you may be eligible for. Eligibility for many of these depend on your income and partially, or completely, phase out as your income increases over certain levels.
1. Earned Income Tax Credit is based on your income, marital status and number of children. This is also one of the few credits that can result in a refund.
2. American Opportunity Tax Credit is for qualified undergraduate education expenses. This credit is only available for up to four years and is partially refundable.
3. Lifetime Learning Credit is available if you had education expenses, whether undergrad, grad school, or taking classes to develop skills with no limit on the number of years you can claim it. This credit cannot be claimed the same year as the American Opportunity Tax Credit (see above) and it is non-refundable.
4. Child and Dependent CareTax Credit is available if you help pay for the care of a dependent (a child or incapacitated spouse/parent) so that you can work. This credit is non-refundable.
5. Child Tax Credit is available to parents of qualifying children age 16 or younger and is refundable up to a certain limit. There is also a smaller tax credit for “other dependents” (children over age 16) available.
6. Adoption Credit is available to those who adopted a child (or children) to help offset the cost of adoption. This credit is non-refundable.
7. Residential Energy Credit is available for the installation of renewable energy (solar, wind, geothermal, fuel cell) systems including water heaters and solar panels. It is a non-refundable credit.
8. Student loan interest is deductible if you pay interest on student loans and your income is below a certain amount. It’s not an itemized deduction, it’s taken above-the-line, which means you subtract the interest you paid to lower your taxable income. If you qualify, you can take both the student loan interest deduction and the standard deduction.
9. Mortgage interest is an itemized deduction (if you choose the standard deduction, you cannot take itemized deductions too). This deduction allows you to deduct the interest (not principal) you pay on a mortgage.
10. Charitable donations are itemized deductions and allow you to subtract the value of your charitable gifts (cash, property, etc) from your taxable income.
11. State, local and real estate taxes that you pay to your city and state as well as any property taxes for homes and vehicles are available as itemized deductions.
12. Medical expenses that are not reimbursed by a medical plan may be deductible (as itemized deductions) if they exceed a certain percentage of your annual gross income.
13. Individual Retirement Account (IRA) contributions may be tax deductible depending on your income and whether you have a spouse that’s covered by a retirement plan at work. Like student loan interest, this is an above the line deduction that can be taken along with the standard deduction.
14. Health Savings Account (HSA): If you’re enrolled in an eligible high deductible health plan and contributing to an HSA, your contributions are tax deductible. HSA contributions are an above the line deduction also.
15. Gambling losses (yes, you read that right) are itemized deductions and deductible up to the extent of your gambling winnings. That means you must report those winnings as taxable income too.
You can read about each of these and more on the IRS website. If you have questions, ask a BrightDime coach.
*This information is as of March 2020. Please make sure to check for any changes to the tax code before completing your tax return.