Popular Tax Deductions and Tax Credits

Highlights:

• Tax deductions decrease the portion of your earnings that are subject to tax, while tax credits offer a dollar-for-dollar reduction of your tax bill.
• There are many different tax credits and deductions. Some of the most common include: the Child Tax Credit (CTC), the Earned Income Tax Credit (EITC), and deductions for student loan interest and retirement plan contributions.
• Tax deductions and credits come into play at different points in the filing process. Deductions are applied before you calculate your taxes, while credits are applied to your final tax bill.

Tax credits and deductions can be key to reducing what you owe come tax season. Here are some of the most popular tax credits and deductions — plus, how to determine if you qualify.

What are tax deductions and how do they work?

Tax deductions decrease the portion of your earnings that are subject to tax. They are usually designed to offset important expenses, like the interest you pay on your student loans. If you qualify for deductions that reduce your taxable income significantly, you may even be able to lower your tax bracket.

When you file your taxes, you can opt to take the standard deduction or itemize your deductions. The standard deduction reduces your taxable income by a fixed amount based on your filing status. Most taxpayers choose to take the standard deduction. Taxpayers typically choose to itemize only when their total deductions exceed the standard deduction.

What are tax credits and how do they work?

Tax credits don't affect your taxable income. Instead, they offer a dollar-for-dollar reduction of your tax bill. You can claim them on IRS Form 1040, following your standard or itemized deductions. Tax credits are available only to qualifying individuals according to factors such as income, family status and financial assets.

Tax credits can be either non-refundable or refundable. Non-refundable tax credits can reduce your tax bill to zero, but never below that point. For example, if you have a tax bill of $250 and a non-refundable tax credit worth $300, your final bill will be $0 and the remaining $50 will go unused.

Refundable tax credits, on the other hand, can reduce your bill to zero and convert leftover money into a tax refund. So, with the same tax bill of $250 but a refundable tax credit worth $300, your tax bill will be reduced to $0 and you'll be left with a $50 refund.

Although tax credits and deductions both offer the opportunity to save on your tax bill, they work in different ways. Tax credits directly reduce what you owe, while tax deductions decrease your taxable income. As a result, tax credits are generally more valuable, but less common than deductions.

Top tax credits and deductions for 2024

There are numerous tax credits and deductions, though many are only available to qualifying filers. Some of the most common deductions include:

• Child Tax Credit (CTC). For filers who are also caregivers for children, the CTC provides up to $2,000 for each child or dependent under the age of 17. You may receive a full or partial credit depending on your income. The CTC itself is non-refundable. However, some filers may qualify for a partial refund of $1,500 per child with the Additional Child Tax Credit (ACTC).
• Earned Income Tax Credit (EITC). If you're a low or moderate earner, you may be eligible for the refundable EITC. With the EITC, you can generally expect to receive a minimum credit of $600, but the amount may be higher if you have qualifying dependents.
• American Opportunity Tax Credit (AOTC). If you're a student or the parent of a dependent student who has not completed the first four years of post-secondary education, you may benefit from this credit. You can receive up to $2,500 for qualified educational costs, such as tuition and textbooks. The AOTC can only be claimed once.
• Student Loan Interest Deduction. With this deduction, you can claim any federal or private student loan interest you paid during the year, up to a maximum of $2,500.
• IRA and 401(k) Deductions. Depending on your income and other factors, contributions to traditional IRAs and traditional 401(k)s may be fully or partially deductible, up to the annual IRS limit.

Other tax credits you may not know about

In addition to these common tax deductions and credits, filers in certain circumstances may qualify for these lesser-known options:

• Savers Tax Credit (STC). If you contributed to a qualifying retirement account like an IRA or 401(k), you may be eligible for this non-refundable credit alongside other relevant deductions. Depending on your adjusted gross income and filing status, you may receive up to $1,000.
• EV Tax Credit. Some electric vehicles (EVs) and fuel-cell electric vehicles (FCEVs) are eligible for a non-refundable clean vehicle tax credit. If you purchase a qualified EV or FCEV that meets certain manufacturing and quality standards, you may receive up to $7,500 for a new vehicle or $4,000 for a used vehicle.
• Residential Clean Energy Credit. This credit can help you recoup a percentage of funds spent on solar, wind, fuel cell, geothermal, and other renewable energy technologies at home.
• State-Specific Tax Credits. Individual states may offer their own tax benefits. Washington state, for instance, offers the Working Families Tax Credit for residents with limited income that resembles the federal EITC. Other states offer credits aimed at renters, parents and guardians of dependents, and energy efficiency. Be sure to look into the offerings for your location.

How to claim tax credits and deductions

Tax credits and deductions come into play at different points in the filing process. Deductions are applied before you calculate your taxes, while credits are applied to your final tax bill. Many taxpayers benefit from both, so it's important to anticipate which credits and deductions you might qualify for before you fill out your Form 1040.

Make sure to maintain detailed records of your income, deductible expenses and relevant tax credits. Compiling receipts, invoices and financial statements throughout the year helps you get a handle on your unique tax situation before it's time to file.

When filling out Form 1040, refer to your records and read the instructions carefully. Tax professionals and specialized tax filing software can help you identify any deductions and credits that you may otherwise miss. With a little preparation, you can file your taxes with confidence — and reduce your tax bill in the process.