Ask an Advisor: What Tax Deductions and Credits Are Available?

Ask an Advisor: What Tax Deductions and Credits Are Available?

Tax deductions and credits can significantly reduce your tax liability, helping you keep more of your hard-earned money. While both serve to lower your tax burden, they function differently: tax deductions can reduce the amount of your taxable income, whereas tax credits directly reduce the amount of tax you owe.

Tax Deductions

There are two main ways to claim deductions: the standard deduction or itemized deductions—but you can only choose one.

• The standard deduction is a fixed amount that lowers your adjusted gross income (AGI). The Tax Cuts and Jobs Act (TCJA) of 2017 nearly doubled the standard deduction but also restricted many itemized deductions through 2025, making the standard deduction the preferred option for most taxpayers.
• Itemizing deductions may be beneficial if your total eligible deductions exceed the standard deduction. However, itemizing requires additional forms and documentation to substantiate your claims.

Common Tax Deductions

• Mortgage Interest: Homeowners can deduct mortgage interest on a primary and second home, but the TCJA limits the deduction to interest on the first $750,000 of mortgage debt. Home equity loan interest is deductible only if the loan is used to buy, build, or improve the home securing the loan.
• Medical Expenses: You can deduct qualified medical expenses exceeding 7.5% of your adjusted gross income (AGI) if they were not reimbursed by insurance or your employer.
• State and Local Taxes (SALT): Taxpayers can deduct up to $10,000 (for married filing jointly) in combined property taxes and either state and local income taxes or sales taxes.
• Charitable Contributions: Cash or property donations can be deducted, typically up to 60% of your AGI. High-income earners may benefit from a Donor-Advised Fund (DAF), which allows them to consolidate multiple years’ worth of donations into one for a larger tax break.
• Health Savings Account (HSA): Contributions and withdrawals are tax-free if used for qualified medical expenses.
• Traditional IRA Contributions: Depending on your income and whether you or your spouse are covered by an employer retirement plan, contributions to a traditional IRA may be tax-deductible.
• Student Loan Interest: Up to $2,500 of student loan interest paid may be deductible.

Tax Deductions for Small Business Owners

Small business owners can take advantage of several deductions, including:

• Qualified Business Income (QBI) deduction
• Home Office or Rent expenses
• Health & Business insurance premiums
• Continuing Education costs
• Auto Expenses related to business travel
• Retirement savings contributions
• Self-Employment taxes
• Office Supplies, Phone & Internet costs
• Business travel & meals
• Advertising & Marketing expenses
• Certain professional memberships

Tax Credits

Unlike deductions, tax credits provide a dollar-for-dollar reduction of your tax bill. Some credits are even refundable, meaning you can receive a refund even if the credit exceeds your tax liability. Common tax credits include:

• Child tax credit
• Child and Dependent Care tax credit
• American Opportunity tax credit (for higher education expenses)
• Lifetime Learning credit
• Child Adoption credit
• Earned Income tax credit (EITC)
• Saver’s Credit (for retirement contributions)
• Residential Energy credit (for energy-efficient home improvements)
• New Clean Vehicle credit

Maximizing Your Tax Savings

Understanding the available tax deductions and credits can help you lower your tax liability. Whether you choose to take the standard deduction or itemize, ensure you maintain proper documentation for all deductions and credits you claim. Consulting a tax professional can help you determine the best strategy for your situation.

By utilizing tax-saving strategies effectively, you can make the most of your deductions and credits while staying compliant with IRS regulations.

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This article was originally published on Wealthtender and is intended for informational purposes only and should not be considered financial advice. You should consult a financial professional before making any major financial decisions. Wealthtender earns money from financial professionals, which creates a conflict of interest when these professionals are featured in articles over others. Read the Wealthtender editorial policy and terms of service to learn more. Wealthtender is not a client of these financial services providers.

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