Doing taxes probably isn't your idea of a good time. Deductions and credits are here to change your mind.
We'll start with some definitions.
Tax deductions indirectly lower your tax bill by lowering your taxable income – by subtracting eligible costs you've paid throughout the year.
Tax credits are even better. Because it's a dollar-for-dollar discount. Meaning a $1,000 tax credit lowers your tax bill by $1,000.
Related: Tax Terms You Need to Know
It's a two-parter:
The standard deduction is a set amount the IRS lets you take, no questions asked. For single filers, the 2019 standard deduction is typically $12,200. It's double that if you’re married and filing jointly. There are a few cases when 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.
Itemized deductions require you to do some HW. As in, make a list of everything you paid for that could qualify. You’ll find yourself asking ‘is this deductible?’ a lot. It could be a 'yes' to medical expenses that add up to a certain percentage of your income, mortgage interest, property taxes, certain biz costs, charitable donations (nice), and some student loan interest.
Be a 'whichever saves more money' person. Taking the standard deduction is nice and easy. But itemizing could help you avoid leaving money on the table. 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 deductions even if you don't itemize. Think: traditional IRA contributions, HSA contributions, and some student loan interest. Accountants call these “above-the-line” deductions.
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." Meaning 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.