A quick intro to deductions and credits
Before we talk about tax deductions and credits, we’ll need to review some basics.
Tax deductions reduce your taxable income. Your tax bill is based on a percentage of your taxable income with the percentage based on what tax bracket you fall into.
For example, if your taxable income is $50,000, you fall into the 22% tax bracket. If you have $1,000 in tax deductions, your taxable income is reduced to $49,000 which saves you $220 (22% of the $1,000 reduction).
Tax credits reduce your tax bill. So if your tax bill is $5,000 and you have $1,000 in tax credits, your tax bill is reduced to $4,000.
Standardized vs itemized deductions
In an effort to make tax filing simpler, the government introduced the standard deduction.
The standard deduction allows tax filers to claim a set tax deduction amount without tallying up their deductible expenses. It’s an amount set every year.
For the 2023 tax year, the standard deduction amount is $13,850 for single filers, up from $12,950 in 2022. The 2023 standard deduction amount increases to $20,800 for heads of households and $27,700 for married couples filing jointly.
The alternative to the standard deduction is the itemized deduction. This is the “traditional” method where you count up all your deductions one by one.
So should you take the standard deduction? You won’t know for sure unless you calculate your itemized deductions. You can do this by filling out Schedule A which would be attached to your personal tax return.
Some rules of thumb to figure out whether you should do the calculation are whether you:
- Had high uninsured dental and medical expenses
- Paid a high amount of interest on a mortgage or property taxes on a home
- Were hit by a disaster and experienced losses that were uninsured
- Made large contributions to qualified charities
- Paid a high amount of state sales taxes
- Paid a large amount of state and local taxes, including state income taxes
There are some tax deductions that you can still claim if you take the standard deduction. We’ll cover one on this list.
Refundable vs nonrefundable credits
There are three types of tax credits: refundable, partially refundable, and nonrefundable.
Refundable tax credits mean that if they reduce your tax bill beyond $0, they turn into a tax refund. For a tax bill of $500 with $600 in tax credits, that becomes a $100 tax refund.
Nonrefundable tax credits do not become a tax refund. With nonrefundable tax credits, a $500 tax bill with a $600 tax credit gets reduced to $0, but no tax refund.
Partially refundable gives you a refund, but only up to a point. For example, a credit might be $2,000 but only $1,400 is refundable. If your tax bill is $500, the full credit would net you a $1,500 refund. But given that only $1,400 is refundable, your refund amount decreases to $1,400.
Personal tax deductions
Personal property tax
What it is: State and local real estate taxes paid
Who qualifies: Owners of real estate
Property taxes are typically charged at the local or state level. On your federal tax return, your property taxes count as deductible expenses.
The maximum total deduction is $10,000, but this is reduced to $5,000 if you are married and filing separately. This means that both you and your spouse can report $5,000 in deductible taxes paid on your federal income tax returns.
You report your personal property tax expenses on Schedule A of IRS Form 1040.
Charitable contributions
What it is: Cash or noncash contributions to eligible charities
Who qualifies: Anyone who has donated money, services, or goods to an eligible charity
Charitable contributions are a common tool people use to reduce their tax bills. It’s a win-win, you get to give to a cause that matters to you and save some money come year-end. To determine if your donation is eligible as a tax deduction, look up the organization using the IRS Tax Exempt Organization Search Tool.
Both cash and noncash contributions are considered tax deductible.
Cash contributions are fairly straightforward to claim as the organization should provide you with the information you need to record the deductions on your tax returns.
For noncash contributions, you must fill out IRS Form 8283 documenting all noncash contributions for all deductions greater than $500. Examples are art, equipment, real estate, vehicles, or clothing and household items.
Determining the value of noncash contributions can get tricky. You need to determine the Fair Market Value (FMV) of the item. FMV is determined by what the item would sell for on the open market. Be prepared to provide reference material to back up the value of what you donated.
Home mortgage interest
What it is: The portion of mortgage payments that goes toward interest
Who qualifies: Anyone who recorded mortgage payments in the tax year
Mortgage payments are made monthly with some portion paying down the principal balance, and the rest paying down the interest charged.
Only the interest portion of these payments is a tax deductible expense. This amount should be reported to you by your mortgage provider on IRS Form 1098.
If you haven’t received IRS Form 1098 yet, you may be able to find the interest paid on an amortization table that would have been provided with your mortgage agreement. However, it’s best to wait to receive the form as a copy is also provided to the IRS. If the amount you report is different than what’s on the form, it could trigger an audit.
Student loan interest
What it is: The portion of student loan payments that goes toward interest
Who qualifies: Anyone who recorded student loan payments in the tax year and meets the eligibility criteria (see below)
Student loan interest can be claimed as an adjustment to income meaning you don’t need to itemize your deductions to use it as part of your tax return.
The maximum allowable deduction is the lesser of $2,500 or the amount of interest actually paid throughout the tax year.
To be eligible to claim the deduction, you must meet the following conditions:
- You were obligated to pay the outlined interest on a qualified loan
- You are not married and filing separately
- Your modified adjusted gross income is less than the annually set specified amount
- Neither you nor your spouse (if filing jointly) were claimed as dependents on someone else’s tax return
Work-related educational expenses
What it is: Tuition, books, supplies, and certain transportation costs associated with education
Who qualifies: Self-employed individuals, Armed Forces reservists, qualified performing artists, eligible government officials, and disabled individuals with impairment-related education expenses
Work-related educational expenses are one of the most restrictive tax deductions on this list. It only applies to a certain subset and specific education opportunities.
The education must be for maintaining or improving skills needed in your present work or be required by your employer or the law to maintain your position.
Education that qualifies you for a new trade or business does not qualify.
However, if you do qualify, almost all costs associated with that education are tax deductible making it a big deduction opportunity for those who qualify.
Fortunately, the IRS offers an Interactive Tax Assistant that helps you determine whether your expenses are eligible.
Medical and dental expenses
What it is: Medical and dental expenses paid for yourself, your spouse, or dependents
Who qualifies: Anyone itemizing their deductions
You can only deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income. Let’s dig into what that means.
Your adjusted gross income (AGI) is the income you pay taxes on after all adjustments are made. Examples of adjustments include IRA contributions, student loan interest, and alimony payments.
For example, if your AGI is $50,000, the 7.5% mark is $3,750. If you had $5,000 in medical expenses, you would subtract $3,750 meaning only $1,250 is tax deductible.
For medical expenses to be eligible, they cannot be reimbursed. A common example of this is when medical expenses are covered by an insurance company. These are not eligible to be reported on an income tax return as deductible expenses.
There’s a wide range of deductible medical expenses. Make sure to review this list to make sure you aren’t leaving any money on the table.
Personal tax credits
Premium Tax Credit
What it is: A credit intended to lower monthly insurance payments for plans enrolled in through the Health Insurance Marketplace
Who qualifies: Families with an income between 100% and 400% of the federal poverty level
The Premium Tax Credit was introduced to subsidize insurance premium payments for families that fall between certain income levels.
The eligible estimated income amount is based on the federal poverty level (FPL), which varies with the size of the household. If it falls within 100% and 400% for the FPL for a household of your size, you may qualify to have part of your premiums subsidized or reimbursed as a refundable tax credit.
Only plans that were acquired through the Health Insurance Marketplace are eligible for the credit. Other providers or coverage through an employer or the government are not eligible. Another caveat is that for married couples, they must file a joint return.
The credit has seen many changes over the past few years in reaction to the COVID pandemic. Use the IRS-provided Interactive Tax Assistant to confirm you’re eligible and stay up-to-date with the changes.
Residential energy credits
What it is: Deductions on investments in renewable energy
Who qualifies: Anyone who invests in renewable energy property improvements such as solar, wind, and geothermal energy sources
For anyone who has invested in green energy sources, 30% of qualified expenses are redeemable as a nonrefundable credit. This is not limited to homeowners; renters can also claim the credit
You aren’t eligible to claim the credit if you don’t live in the home where the improvement was made.
For anyone who partly uses their home for business, there are some limitations. You can take the full credit amount if business use is 20% or less of the total property.
Once business use exceeds 20%, the credit is based on how much of the expense is allocated to nonbusiness use. So if 25% of your home is used for business purposes, then only 75% of the expense can be included in the credit calculation.
Only brand new purchases are eligible. Any used or previously owned clean energy equipment cannot be claimed.
Energy Efficient Home Improvement credit
What it is: Home improvements like insulation, heat pumps, and energy audits that improve energy efficiency
Who qualifies: Homeowners who made qualified improvements in the tax year
Small improvements to a home can cut your energy bill. But these improvements can also cut down your tax bill.
For improvements made in 2023, the credit is 30% of the improvement costs up to a maximum of $1,200. This is a nonrefundable credit.
Certain types of improvements have a separate annual credit limit. For example, heat pumps, biomass stoves, and boilers have a limit of up to $2,000 per year. Get a more in-depth breakdown on the Energy.gov website.
This credit only applies to your primary residence. You can’t claim the credit as a landlord or property owner who isn’t living in the home.
Foreign tax credit
What it is: A reduction of taxes when your income is taxed by another country
Who qualifies: Individuals, estates, or trusts who paid accrued foreign taxes
The purpose of the foreign tax credit is to support US citizens taxed by other countries on the same income. There’s an Interactive Tax Assistant for checking your eligibility.
This credit is unique in that it can be taken as either a deduction or a credit. The IRS notes that it’s often to the advantage of the taxpayer to take it as a credit, so this guide will focus on that process.
Taxpayers claim the foreign tax credit by filing IRS Form 1116. However, it’s possible to claim the credit without the form if you meet certain conditions.
There isn’t a set credit limit amount. Instead, it’s dependent on your total US tax liability, your taxable income outside of the US, and your taxable income within the US. To calculate your credit limit, multiply your US tax liability by your taxable income outside of the US, then divide by your taxable income within the US.
The foreign tax credit comes with some of the most complex compliance laws. The IRS offers a guide on foreign tax credit compliance, but when in doubt, talk to an accountant.
Clean vehicle tax credits
What it is: Purchasing an electric vehicle (EV) or fuel cell vehicle (FCV)
Who qualifies: Car purchasers whose adjusted gross income does not exceed a set threshold
The clean vehicle tax credit applies to both new and used car purchases, so long as they are purchased from a licensed dealer. The credit limits and qualifications vary depending on whether it was a new or used purchase.
For new vehicles, your modified adjusted gross income may not exceed $150,000 ($300,000 for married couples filing jointly, $225,000 for heads of households). The credit calculation then depends on whether the vehicle was placed in service before or after April 17, 2023.
If the vehicle was placed in service after April 17, the calculation is simple. The credit is $3,750 if it meets one of the critical minerals and battery components requirements, or $7,500 if it meets both.
If the vehicle was placed in service before April 17, the credit starts at $2,500. Add $417 for a vehicle with at least 7 kilowatt hours of battery capacity. Add another $417 for each kilowatt hour of battery capacity beyond 5 kilowatt hours. Given that the vehicle must have at least 7 kilowatt hours of capacity to qualify, the minimum credit is $3,751 ($2,500 plus three $417 additions).
Used vehicles must be purchased from a licensed dealer. The credit is 30% of the sale price with a maximum of $4,000. The modified adjusted gross income amount requirement is reduced to $75,000 ($150,000 for married couples filing jointly, $112,500 for heads of households).
The used vehicle must have a sale price of $25,000 or less, including all dealer-imposed costs or fees. The model year must be at least 2 years earlier than the tax year you purchased it in, have a gross vehicle weight rating of less than 14,000 pounds, and have a battery capacity of at least 7 kilowatt hours.
Child Tax Credit
What it is: A flat credit for each qualifying child under the age of 17 at the end of the year
Who qualifies: Taxpayers reporting qualified dependents on their tax return
The Child Tax Credit is easy to determine if you’re eligible, and how much of a credit you’re eligible for.
The credit is $2,000 per qualifying dependent under the age of 17. This is a nonrefundable credit. It’s only available for those with a modified adjusted gross income of $200,000 or less ($400,000 for married couples filing jointly).
To qualify, the dependent must:
- Be under age 17 at the end of the tax year
- Be your son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of one of these
- Provide no more than half of their own financial support during the year
- Have lived with you for more than half the year
- Be properly claimed as your dependent on your tax return
- Not file a joint return with their spouse for the year, or file it only to claim a refund of withheld income tax or estimated tax paid
- Have been a US citizen, US national, or US resident alien
Child and Dependent Care Credit
What it is: Paying for child care while working or actively looking for work
Who qualifies: Anyone with a dependent qualifying child under age 13 incapable of self-care
Unfortunately, many circumstances of working mean not being able to provide child care at all times. The IRS makes paying for child care easier with the Child and Dependent Care Credit.
How much of a credit you can claim depends on your adjusted gross income. If it’s $15,000 or under, the credit is 35% of your total eligible expenses. This percentage decreases incrementally to a minimum of 20% for an adjusted gross income of $43,000 or more.
The maximum expense amount used to calculate the credit is $3,000 for one qualifying individual or $6,000 for two or more individuals.
To claim the credit, complete the calculations on IRS Form 2441 and submit with your personal tax return.
Further reading: What Small Business Owners Should Know About the Child and Dependent Care Tax Credit
Earned Income Tax Credit
What it is: A tax credit for low to moderate income tax filers that increases with qualified children
Who qualifies: Anyone whose adjusted gross income falls under the threshold
The Earned Income Tax Credit (EIC) gives anyone who reports a low to moderate adjusted gross income on their tax return a tax break. It’s a refundable credit meaning you’ll get a tax return if the credit reduces your tax bill enough.
The amount of the EIC depends on two main factors: adjusted gross income and number of children (or relatives) claimed. The credit ranges from $600 for filers with no children to $7,430 with three or more children.
Similarly, the maximum allowable adjusted gross income scales with the number of children. With no children, the maximum adjusted gross income is $17,640 ($24,210 if married and filing together). This scales up to $56,838 with three children ($63,398 if married and filing jointly).
Without children, you simply need to note your EIC amount on IRS Form 1040. However, if you have qualifying children, you must complete and attach Schedule EIC to your tax return.
