When you're planning vacations, more breaks are always better. Taxes work the same way, because more breaks mean more savings.
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So, there are two types you want to know about:
Tax deductions let you lower your taxable income by subtracting certain eligible costs you've paid throughout the year. They indirectly lower your tax bill.
Tax credits are even better. They give you a dollar-for-dollar discount. Meaning you’d lower your tax bill by $1,000 if you qualify for a credit of $1,000.
Related: Tax Terms You Need to Know
Save the best for last. How do I get deductions?
The standard deduction is what the IRS lets you write off, no questions asked. For single filers, the 2019 standard deduction is typically $12,200. Double if you’re married and filing jointly. But there are a few cases where that number would be different, like if someone claims you as a dependent. The IRS’s Interactive Tax Assistant can give you a final answer.
An itemized deduction takes a little more work. You’ll find yourself asking ‘is this deductible?’ a lot. It’s usually a yes to medical expenses, mortgage interest, property taxes, certain biz costs, charitable donations (nice), and some student loan interest.
Which one should I go with?
The higher one. Standard deductions are nice and easy, but itemizing guarantees you won’t leave any money on the table. You’ll want to look back at your receipts and do the math.
Keep in mind: tax code changes that went into effect last year nearly doubled the standard deduction, so it’s a high threshold to top.
Bonus: you can claim a few extra deductions even if you don’t itemize. Think: traditional IRA contributions, health-savings account contributions, and some student-loan interest. Accountants call these “above-the-line” deductions.
Can you get back to credits while I find my calculator?
Here's the Skimm on some popular federal ones.
The Child Tax Credit is worth up to $2,000 for every qualifying kid under 17. And $1,400 of that is refundable, so you’ll get a refund for the amount if you owe $0 in taxes. Suddenly, more kids seem like a great idea.
The American Opportunity Tax Credit helps offset the high cost of higher education. It’s worth up to $2,500 a year for each eligible student in your household. And 40% of it (up to $1,000) is refundable.
The Saver's Credit is Uncle Sam’s way of rewarding you for planning ahead. It gets you 10%-50% of your qualified retirement contribution, worth up to $1,000 for single filers and $2,000 for joint filers. Not-so-fun fact: income limits apply.
You might also qualify for state and local tax credits. By doing things like installing an energy-efficient water heater and installing solar panels. Green recognize green.
Credits and deductions are the MVPs of tax season. Giving you the discounts you deserve, and keeping more money in your wallet. Go team.