By: John S. Morlu II, CPA
Tax credits and deductions are essential tools for reducing the amount of tax you owe or increasing your refund. By understanding how they work and knowing which ones you qualify for, you can maximize your tax savings. Here’s a clear guide to help you navigate credits and deductions when filing your tax return.
How Tax Credits and Deductions Work
Tax Credits
A tax credit directly reduces the amount of tax you owe. Some credits are refundable, meaning you can receive money back even if your tax liability is zero. For example, if you owe $500 in taxes and qualify for a $1,000 refundable credit, you will receive a $500 refund.
To claim credits:
- Use tax filing software, which will guide you through the process by asking relevant questions.
- If filing a paper return, complete the appropriate forms and attach them to your tax return.
Common Tax Credits for Individuals
Here are some of the most common credits you may qualify for:
1. Earned Income Tax Credit (EITC)
- Designed for people with lower income levels.
- Refundable, so you can get money back even if you don’t owe taxes.
- You can claim it even if you’re not required to file a tax return.
2. Credits for Parents or Caretakers
- Child Tax Credit: For parents with children or other dependents.
- Adoption Credit: Helps offset the costs of adopting a child.
- Child and Dependent Care Credit: For expenses paid to care for a child or dependent while you work or study.
3. Education Credits
- Available for those paying tuition or other qualifying education expenses.
- Examples include the American Opportunity Tax Credit and Lifetime Learning Credit.
4. Retirement Savings Credit
- Offers a credit for contributing to retirement accounts like IRAs or employer-sponsored plans.
5. Clean Energy and Vehicle Credits
- Electric and Hybrid Vehicles: Tax credits for purchasing clean energy vehicles.
- Home Energy Improvements: Credits for upgrading your home with energy-efficient systems.
6. Premium Tax Credit
- Helps individuals and families pay for health insurance purchased through the marketplace.
- Ensure you include Form 8962 if applicable.
7. Other Personal Tax Credits
- Credits for less common situations, including:
- Taxes paid overseas.
- Overpaid Social Security or RRTA tax.
- Alternative Minimum Tax (AMT) paid in prior years.
- Tax on undistributed capital gains.
Tax Deductions
A deduction reduces your taxable income, which lowers the amount of taxes you owe. For example, if you earned $50,000 and qualify for $10,000 in deductions, your taxable income becomes $40,000.
To claim deductions:
- Keep documentation of all deductible expenses or losses.
- Use tax software to calculate deductions or file them on Form 1040 for paper returns.
Standard vs. Itemized Deductions
Standard Deduction
Most taxpayers choose the standard deduction, a fixed amount subtracted from your income based on your filing status.
Standard Deduction for 2024:
The standard deduction amounts for the 2024 tax year, to be used when filing taxes in 2025, have increased due to inflation adjustments. The new standard deduction amounts are:
- $14,600 for single or married filing separately.
- $29,200 for married filing jointly or qualifying surviving spouse.
- $21,900 for head of household.
Additional Adjustments
- Taxpayers aged 65 or older, or who are blind, can claim an additional $1,550 if married or a qualifying surviving spouse, and $1,950 if single or head of household.
Adjustments:
- If you’re over 65 or blind, you qualify for a higher deduction.
- Dependents on someone else’s return have different deduction rules.
- If married filing separately, both spouses must either take the standard deduction or itemize.
Itemized Deductions
If your deductible expenses exceed the standard deduction, you may save more by itemizing. Tax software can guide you to decide which option is better for you.
Deductible Expenses
You can deduct certain expenses regardless of whether you take the standard deduction or itemize, including:
- Alimony payments.
- Business use of a car or home.
- Contributions to IRAs or health savings accounts.
- Student loan interest.
- Teacher-related expenses.
- Moving expenses (for military members).
- Work-related education expenses (for specific groups, like government workers or people with disabilities).
If you choose to itemize, you can also deduct:
- Bad debts and canceled home debt.
- Capital losses and gains from the sale of your home.
- Charitable donations.
- Gambling losses.
- Home mortgage interest.
- Medical and dental expenses exceeding 7.5% of your adjusted gross income.
- Property, income, and sales taxes.
- Losses from disasters or theft.
- Opportunity zone investments.
Making the Most of Your Tax Savings
To maximize your savings:
1. Keep accurate records of all potential credits and deductions throughout the year.
2. Use reliable tax software or work with a tax professional to ensure you claim everything you qualify for.
3. Review your financial situation annually to identify opportunities for additional credits or deductions.
By taking full advantage of available tax credits and deductions, you can significantly reduce your tax liability and increase your refund.
Author: John S. Morlu II, CPA
John S. Morlu II, CPA, is the CEO and Chief Strategist of JS Morlu, a globally acclaimed public accounting and management consulting powerhouse. With his visionary leadership, JS Morlu has redefined industries, pioneering cutting-edge technologies across B2B, B2C, P2P, and B2G landscapes.
The firm’s groundbreaking innovations include:
• ReckSoft (www.ReckSoft.com): AI-driven reconciliation software revolutionizing financial accuracy and efficiency.
• FinovatePro (www.FinovatePro.com): Advanced cloud accounting solutions empowering businesses to thrive in the digital age.
• Fixaars (www.fixaars.com): A global handyman platform reshaping service delivery and setting new benchmarks in convenience and reliability.
Under his strategic vision, JS Morlu continues to set the gold standard for technological excellence, efficiency, and transformative solutions.
