Tax deductions and credits can be confusing. But they can also be great money-savers as long as you know what they are, how they work, and how to use them. That’s why we’ve created this “cheat sheet” or guide to the latest tax breaks and how to apply them.
What is a tax deduction?
You can use a tax deduction to lower your taxable income. By reducing your taxable income, you can reduce your tax liability. The amount of the deduction is subtracted from your income. This makes the amount of your income that is taxable lower, lowering your tax bill.
What is a tax credit?
A tax credit is deducted from your actual tax bill. Some, but not many, tax credits are refundable. That means if you owe $250 in taxes but are qualified for a tax credit of $1000, you could get a check for the $750 check for the difference. In most cases, a tax credit can make a bigger dent in a tax bill than a tax deduction can.
Let’s look at an example. If your AGI (Adjusted Gross Income) is $100,000 and you have a $10,000 tax deduction, your taxable income becomes only $90,000. Your taxes on that amount will be $22,500. That is your tax bill. But if your taxable income is $100,000 and you calculate your tax, which is $25,000 and deduct the tax credit of $10,000, then your tax bill is only $15,000.
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How do you claim tax deductions on your taxes?
There are only two ways to claim deductions. You can either take a standard deduction or itemize them. But you cannot do both. The standard deduction is a flat-dollar reduction in your AGI. Your filing status determines the amount you qualify for.
Standard Deduction 2021 Per Filing Status
- Single – $12,550 deduction
- Married, filing jointly – $25,100 deduction
- Married, filing separately – $12,550 deduction
- Head of household – $18,800 deduction
Standard Deduction 2022 Per Filing Status
- Single – $12,950 deduction
- Married, filing jointly – $25,900 deduction
- Married, filing separately – $12,950 deduction
- Head of household – $19,400 deduction
Those who are over the age of 65 and those who are blind get larger standard deductions too.
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Itemizing Deductions
There are hundreds of available tax deductions that you may qualify for. They can help you reduce your taxable income drastically. The more you can deduct, the less you’ll owe in taxes.
Which is better, itemizing or taking the standard deduction?
The choice to itemize or take the standard deduction comes down to a couple of things such as:
- Compare your itemized deductions to the standard deduction. If the standard deduction is less than all of your itemized deductions added together, itemizing may save you more money. However, remember that itemizing takes more time and you’ll need to fill out more forms. You will also need to provide proof that you qualify for taking each deduction.
- If your standard deduction ends up being more than your itemized deductions added together, you might want to consider taking the standard deduction.
One important thing to note is that the standard deduction has increased quite a lot over the last few years, so it may be a better option than itemizing. You can look at both options to see which way reduces your tax bill the most.
Top 20 Tax Deductions and Tax Credits for Individuals
- Child tax credit
- Child and dependent care tax credit
- American opportunity tax credit
- Lifetime learning credit
- Student loan interest deduction
- Adoption credit
- Earned income tax credit
- Charitable donations deduction
- Deduction for state and local taxes
- Medical expenses deduction
- Mortgage interest deduction
- Gambling loss deduction
- IRA contributions deduction
- 401K contributions deduction
- Saver’s credit
- Self-employment expenses deduction
- HSA (Health Savings Account) contributions deduction
- Home office deduction
- Residential energy credit
- Educator expenses deduction
