Tax Deductions & Credits
Deductions and credits are two ways of saving money on your taxes. Learn the important difference between these two ways of reducing your tax bill, and how you can use every tax benefit you're eligible to take.
What’s the best way to use credits and deductions to minimize your tax bill?
Tax credits offset the taxes you owe on a dollar-for-dollar basis, but deductions are offset against your income. Make sure you don’t miss a single credit you are eligible for. Then add up the deductions you could itemize and see if they will amount to more than the standard deduction.
What are the ways that having a dependent can lower your taxes?
A dependent child or other relative can be worth thousands of dollars of reduction in your tax bill through benefits such as the child tax credit, earned income tax credit, child and dependent care credit and other tax breaks. Learn them all. Divorced parents have to decide which parent gets the tax benefit.Learn More: How Much Does a Dependent Reduce Your Taxes?
Do you save on taxes if you file as head of household?
If you’re single or in some stage of separation you could benefit financially from filing as head of household. Key benefits are a more favorable tax rate and a higher standard deduction. To qualify, you must provide more than 50% of the cost of supporting a dependent such as a child, parent or sibling.
What’s the best way to use above-the-line deductions—and who gets them?
You can take these special deductions even if you don’t itemize your taxes and instead take the standard deduction. These include deductions for retirement plan contributions, contributions to Health Savings Accounts and Archer Medical Savings Accounts, health insurance premiums if you’re self-employed, and expenses if you’re an educator.
What can you deduct on a rental property?
As owner of a rental property, you can deduct the costs of owning, maintaining, and operating it. Depreciation for most residential property is at the rate of 3.636% per year for 27.5 years—the IRS’s definition of a property’s “useful life.” You can’t depreciate the land, only the building. Tax treatment of income and losses depends on your level of involvement in property management—material participation, active participation, or passive activity.Learn More: Rental Property Tax Deductions
Can I deduct mortgage insurance payments from my taxes?
Private mortgage insurance (PMI), sometimes known as the mortgage insurance premium (PMI) was first banned starting in tax year 2018. The Further Consolidated Appropriations Act of 2020 allowed MIP and PMI tax deductions for 2020 and retroactively for 2018 and 2019. But after that, these insurance payments are not deductible unless Congress acts again. Other limitations to taking the deduction applied, including income limitations.Learn More: When Is Mortgage Insurance Tax Deductible?
When you get a tax credit you can subtract it—dollar for dollar—from the taxes you owe. They’re better than tax deductions, which just reduce taxable income depending on your tax bracket. Credits can be refundable, nonrefundable and partially refundable.
Tax deductions are subtracted from your taxable income, lowering the amount on which you get taxed. You can either take a standard deduction or itemize your deductions on Schedule A. The Tax Cuts and Jobs Act nearly doubled the standard deduction, but also eliminated or limited many tax deductions, including for mortgage interest.
The standard deduction is a specific amount that can be subtracted from your income, which is adjusted yearly for inflation and reflects your tax filing status. You can take this deduction or, instead, itemize your specific deductions—whichever provides the best tax benefit.
If you list all the specific deductions you’re allowed—mortgage interest, charitable gifts, unreimbursed medical expenses, and more—on Schedule A of your income tax return, you can use this figure instead of the standard deduction to reduce your taxable income if it’s more beneficial. Fewer people do this since the Tax Cuts and Jobs Act almost doubled the standard deduction.
Child Tax Credit
At $2,000 per eligible child under 17 (more in 2021, and for children under 18) this partially refundable credit helps parents with the cost of raising kids. In 2021, it was payable in advance. Only one taxpayer can claim the credit—an issue for divorced parents who share custody.
Property Tax Deduction
State and local governments assess property taxes that can be the source of a deduction on qualifying real estate (rental property isn’t eligible). Taxpayers must itemize deductions to get this tax benefit.
Capital Loss Carryover
If your capital losses are higher than your capital gains in any year, you can use them to offset ordinary taxable income up to $3,000 in that year. If your losses were higher than that amount, you can carry them forward into the next years at $3,000 per year until the loss total is exhausted.