On a similar note...
On a similar note...
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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?
Less: tax deduction
Less: tax credit
Your tax bill
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 deduction
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.
2020 tax year
2021 tax year
Married, filing jointly
Married, filing separately
Head of household
People over age 65 or who are blind get a bigger standard deduction.
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.
20 popular tax deductions and tax credits for individuals
There are hundreds of deductions and credits out there. Here's a drop-down list of some common ones, as well as links to our other content that will help you learn more.