Taxes can be confusing, but knowing which deductions and credits you qualify for could mean paying less and keeping more of your money. Whether you’re a parent, a student, a homeowner, or a retiree, there may be ways to reduce your tax bill, depending on your circumstances.
This guide breaks down the most common tax breaks for 2025 so you can save more and stress less when tax season rolls around.
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What Is a Tax Deduction?
A tax deduction is a way to reduce the amount of your income that gets taxed. It’s like a special discount the government gives you when you spend money on certain qualifying expenses.
When you claim a tax-deductible expense, you subtract that amount from your total income. Since your taxable income is now lower, the taxes you owe decrease.
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✏️ Hypothetical Example: Imagine you earn $100,000 in a year and claim $10,000 in tax deductions. Instead of being taxed on the full $100,000, you’ll only be taxed on $90,000. Lower taxable income typically results in a lower tax bill.
Deductions can come from a variety of expenses, like mortgage interest, student loan interest, or charitable donations. The key is that these expenses must meet IRS requirements to qualify.
📌 Also read: Tax Brackets And Federal Income Tax Rates
Common Tax Deductions
- State and Local Taxes (SALT): You can deduct up to $10,000 of combined state and local income, sales, and property taxes on your federal return.
- Mortgage Interest: Deduct interest paid on mortgages up to $750,000. For mortgages before December 15, 2017, the limit is $1 million.
- Charitable Contributions: Donations to qualified charities are deductible, subject to certain income limitations.
- Medical and Dental Expenses: Deduct unreimbursed expenses exceeding 7.5% of your adjusted gross income.
- Retirement Contributions: Contributions to traditional IRAs and 401k plans can reduce taxable income, with specific annual limits.
- Education Expenses: The American Opportunity Tax Credit (AOTC) offers up to $2,500 per eligible student for qualified education expenses.
- Business Expenses: Self-employed individuals can deduct ordinary and necessary expenses related to their business operations.
- Casualty and Theft Losses: Deduct losses from federally declared disasters, subject to specific limitations.
📝 Important notes:
- Not all taxpayers qualify for every deduction, and some have income-based phaseouts or specific eligibility criteria. For detailed information, visit the IRS Credits and Deductions for Individuals page.
- The 2017 Tax Cuts and Jobs Act (TCJA) put a temporary pause on certain deductions, like job search expenses and moving expenses, for most taxpayers from 2018 to 2025. However, active-duty military members moving under orders can still claim these deductions. Unless laws change, they’re set to return in 2026.
What Is a Tax Credit?
A tax credit is a dollar-for-dollar reduction in the amount of taxes you owe. Unlike a tax deduction which could lower your taxable income, a tax credit directly reduces your tax bill. This may have a greater impact on your savings, depending on your tax situation.
✏️ Hypothetical Example: If you owe $1,000 in taxes and qualify for a $200 tax credit, your tax bill drops to $800.
Some tax credits are refundable, meaning if the credit is more than what you owe, you could get the difference as a refund. Others are non-refundable, meaning they can only reduce your tax bill to zero but won’t give you extra money back.
Common Tax Credits
- Child Tax Credit: The government may provide up to $2,000 per qualifying child under the age of 17, depending on income and other eligibility factors.
- Earned Income Tax Credit (EITC): Offers a refundable credit for low- to moderate-income workers and families. For 2025, the maximum EITC amount for taxpayers with three or more qualifying children is $8,046.
- American Opportunity Tax Credit: Provides credit of up to $2,500 for qualified education expenses for each eligible student during the first four years of higher education. Up to $1,000 of this credit is refundable.
- Lifetime Learning Credit: Offers a credit of up to $2,000 for education expenses for any level of post-secondary education.
- Child and Dependent Care Credit: Provides a credit for a percentage of work-related expenses incurred for the care of a qualifying child under age 13, a disabled spouse, or a dependent, with a maximum of $3,000 for one qualifying individual or $6,000 for two or more.
- Adoption Credit: Allows adoptive parents to claim a credit of up to $16,810 for qualified adoption expenses.
- Residential Energy-Efficient Property Credit: Provides a credit for installing renewable energy systems, such as solar panels, wind turbines, and geothermal heat pumps, in your home. For systems installed after January 1, 2023, the credit equals 30% of the cost of qualified property.
- Foreign Tax Credit: Offers a credit for income taxes paid to a foreign country.
- Credit for the Elderly or the Disabled: Provides a credit ranging from $3,750 to $7,500 for individuals who are 65 or older or who are retired on permanent and total disability, depending on filing status and income.
- Nonbusiness Energy Property Credit: Offers a credit for making energy-efficient improvements to your home, such as adding insulation or replacing windows. For improvements made after January 1, 2023, you may qualify for a tax credit of up to $3,200.
How to Claim Tax Deductions and Credits
The steps to claim a deduction or credit can vary depending on the type. For most tax deductions, you can follow the steps below:
- 1. Determine Your Eligibility: Ensure you qualify for specific deductions or credits. Some have income limits, age requirements, or other criteria. For instance, the Earned Income Tax Credit (EITC) has income thresholds based on filing status and number of dependents.
- 2. Maintain Accurate Records: Keep thorough documentation, such as receipts, invoices, and relevant forms, to support your claims. Proper records are essential in case of an audit.
- 3. Select the Appropriate Tax Forms:
- Form 1040: Used by most taxpayers to file individual federal tax returns.
- Schedule C (Form 1040): For reporting income or loss from a business you operated or a profession you practiced as a sole proprietor.
- 4. Complete the Necessary Sections: Accurately fill out your tax return, ensuring all eligible deductions and credits are included. For example, to claim education credits like the American Opportunity Tax Credit, complete Form 8863 and attach it to your Form 1040.
- 5. Calculate Deductions and Credits:
- Deductions: Subtract these from your gross income to determine your taxable income.
- Credits: Directly reduce your tax liability. Some credits, like the EITC, are refundable, meaning they can increase your refund even beyond your tax liability.
- 6. File Your Tax Return: Submit your completed tax return and all supporting documents to the IRS by the annual deadline, typically April 15. Filing electronically and opting for direct deposit can expedite the process and reduce errors.
📝 Note: Tax laws can change and individual circumstances vary. Consult the latest IRS guidelines or a tax professional to ensure accuracy and compliance.
📌 Also read: Important Tax Filing Deadlines To Remember
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