How to Know What You Get Back for Federal Taxes

December 19, 2021 Post a Comment

Tax deductions and tax credits can be huge money-savers — if you know what they are, how they work and how to pursue them. Here's a cheat sheet.

What is a tax deduction?

A tax deduction lowers your taxable income and thus reduces your tax liability. You subtract the amount of the tax deduction from your income, making your taxable income lower. The lower your taxable income, the lower your tax bill.

What is a tax credit?

A tax credit is a dollar-for-dollar reduction in your actual tax bill. A few credits are refundable, which means if you owe $250 in taxes but qualify for a $1,000 credit, you'll get a check for the difference of $750. (Most tax credits, however, aren't refundable.)

As the simplified example in the table shows, a tax credit can make a much bigger dent in your tax bill than a tax deduction.

	Would you rather have:
	A $10,000 tax deduction…	…or a $10,000 tax credit?
Your AGI	$100,000	$100,000
Less: tax deduction	($10,000)
Taxable income	$90,000	$100,000
Tax rate*	25%	25%
Calculated tax	$22,500	$25,000
Less: tax credit		($10,000)
Your tax bill	$22,500	$15,000
* Example rate. The U.S. has a progressive tax system .

How to claim tax deductions

Generally, there are two ways to claim tax deductions: Take the standard deduction or itemize deductions. You can't do both.

The standard tax deduction for 2020 and 2021

The standard deduction basically is a flat-dollar, no-questions-asked reduction in your adjusted gross income (AGI). The amount you qualify for depends on your filing status.

Filing status	2021 tax year	2022 tax year
Single	$12,550	$12,950
Married, filing jointly	$25,100	$25,900
Married, filing separately	$12,550	$12,950
Head of household	$18,800	$19,400

People over age 65 or who are blind get a bigger standard deduction.

Itemizing deductions

Itemizing lets you cut your taxable income by taking any of the hundreds of available tax deductions you qualify for. The more you can deduct, the less you'll pay in taxes.

Should you itemize or take the standard deduction?

Here's what the choice boils down to:

If your standard deduction is less than the sum of your itemized deductions, you probably should itemize and save money. Beware, however, that itemizing usually takes more time, requires more forms and you'll need to have proof that you're entitled to the deductions.
If your standard deduction is more than the sum of your itemized deductions, it might be worth it to take the standard deduction (and the process is faster).

Note: The standard deduction has gone up significantly in recent years, so you might find that it's the better option for you now even if you've itemized in the past.

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20 popular tax deductions and tax credits for individuals

There are hundreds of deductions and credits out there. Here's a drop-down list of some common ones, as well as links to our other content that will help you learn more.

Student loan interest deduction

Deduct up to $2,500 from your taxable income if you paid interest on your student loans. (How it works.)

American Opportunity Tax Credit

This lets you claim all of the first $2,000 you spent on tuition, books, equipment and school fees — but not living expenses or transportation — plus 25% of the next $2,000, for a total of $2,500. (How it works.)

You can claim 20% of the first $10,000 you paid toward tuition and fees, for a maximum of $2,000. Like the American Opportunity Tax Credit, the Lifetime Learning Credit doesn't count living expenses or transportation as eligible expenses. You can claim books or supplies needed for coursework. (How it works.)

Child and dependent care tax credit

Generally, it's up to 35% of up to $3,000 of day care and similar costs for a child under 13, a spouse or parent unable to care for themselves, or another dependent so you can work — and up to $6,000 of expenses for two or more dependents. In 2021, it's up to 50% of $8,000 of expenses for one dependent or $16,000 for two or more dependents. (How it works.)

This could get you up to $2,000 per child and $500 for a non-child dependent in 2020 and up to $3,600 per child in 2021. (How it works.)

For the 2020 tax year, this item covers up to $14,300 in adoption costs per child. In 2021, it's $14,440. (How it works.)

This credit can get you between $538 to $6,660 in 2020 depending on how many kids you have, your marital status and how much you make. It's something to explore if your AGI is less than about $57,000. For 2021, the earned income credit ranges from $543 to $6,728. (How it works.)

Charitable donations deduction

If you itemize, you may be able to subtract the value of your charitable gifts — whether they're in cash or property, such as clothes or a car — from your taxable income. And for the 2020 tax year, you may be able to deduct $300 on your tax return without having to itemize. (How it works.)

Medical expenses deduction

In general, you can deduct qualified, unreimbursed medical expenses that are more than 7.5% of your adjusted gross income for the tax year. (How it works.)

Deduction for state and local taxes

Mortgage interest deduction

The mortgage interest tax deduction is touted as a way to make homeownership more affordable. It cuts the federal income tax that qualifying homeowners pay by reducing their taxable income by the amount of mortgage interest they pay. (How it works.)

Gambling losses and expenses are deductible only to the extent of gambling winnings. So, spending $100 on lottery tickets isn't deductible — unless you win, and report, at least $100, too. You can't deduct more than the amount you win. (How it works.)

IRA contributions deduction

You may be able to deduct contributions to a traditional IRA, though how much you can deduct depends on whether you or your spouse is covered by a retirement plan at work and how much you make. (How it works.)

401(k) contributions deduction

The IRS doesn't tax what you divert directly from your paycheck into a 401(k). In 2021, you can funnel up to $19,500 per year into such an account. If you're 50 or older, you can contribute up to $26,000. In 2022, the contribution limit increases to $20,500 per year ($27,000 for those 50 or older). These retirement accounts are usually sponsored by employers, although self-employed people can open their own 401(k)s. (How it works.)

This runs 10% to 50% of up to $2,000 in contributions to an IRA, 401(k), 403(b) or certain other retirement plans ($4,000 if filing jointly). The percentage depends on your filing status and income. (How it works.)

Health Savings Account contributions deduction

Contributions to HSAs are tax-deductible, and the withdrawals are tax-free, too, as long as you use them for qualified medical expenses. For 2020, if you have self-only high-deductible health coverage, you can contribute up to $3,550. If you have family high-deductible coverage, you can contribute up to $7,100 in 2020. For 2021, the individual coverage contribution limit is $3,600 and the family coverage limit is $7,200. If you're 55 or older, you can put an extra $1,000 in your HSA. (How it works.)

Self-employment expenses deduction

There are many valuable tax deductions for freelancers, contractors and other self-employed people. (How it works.)

If you use part of your home regularly and exclusively for business-related activity, the IRS lets you write off associated rent, utilities, real estate taxes, repairs, maintenance and other related expenses. (How it works.)

Educator expenses deduction

If you're a school teacher or other eligible educator, you can deduct up to $250 spent on classroom supplies.

Residential energy credit

This one can get you up to 26% of the installation cost of solar energy systems, including solar water heaters and solar panels. (Read more.)

The list is here.

See 2021's best tax software and more. All backed by tons of nerdy research.