Deductions and credits are two terms that are commonly misused. Both can minimize your tax liability, but they are separate concepts. As an individual or business owner, you need to understand those differences. This article will define the two terms and show several deductions and credits you can use this year. Some key takeaways:
- A tax deduction reduces your taxable income. Tax credits are applied to your tax liability in Lines 16 through 23 of Form 1040.
- The standard deduction for the 2025 tax year is $15,000 for single individuals and $30,000 for married people filing jointly.
- Certain tax credits, like EITC and the Savers Credit, can boost your income, so it’s prudent to claim them whenever possible.
Understanding Tax Deductions vs. Tax Credits
A tax deduction is applied to your taxable income. A tax credit reduces your tax liability. They sound the same when you look at the definitions. The difference is how you report them on a tax form. Credits also typically expire after a certain amount of time. Deduction levels may change, but most remain a part of your annual tax filings.
The standard deduction is a good example. It was established by the Individual Income Tax Act of 1944, so it’s been around for almost a century. The amount changes each year. For instance, the standard deduction for the 2025 tax year is $15,000 for single individuals and $30,000 for married people filing jointly. Those numbers were $14,600 and $29,200 in 2024.
An example of a tax credit is the home mortgage interest credit. This is often miscategorized as a deduction, but it’s a credit applied after calculating your taxable income on Line 15 of Form 1040. Credits are entered on Lines 16 through 23. Open the form in another browser tab to see how this is laid out.
Commonly Overlooked Tax Deductions
Several deductions are overlooked by taxpayers every year. In some cases, the taxpayer is simply not aware of them. That’s a good argument for hiring a CPA. In others. An individual might not be sure if they’re qualified for the deduction and don’t want to take it and get penalized. Here are some examples of deductions you might miss:
- Student Loan Interest Deduction: The back-and-forth on student loan forgiveness and government amnesties on payments have created a mess for taxpayers. Check with your accountant on this, even if you didn’t make any payments this year.
- Medical and Dental Expenses: Eligibility requirements are the biggest obstacle to taking a medical or dental deduction. Emergency and essential expenses likely qualify. Elective or cosmetic surgeries don’t. Prescription costs might.
- Home Office Deduction: You can deduct $5 per square foot for up to 300 square feet of space in your home that you use exclusively for work, but you might be better off itemizing your business expenses.
- Job Search Expenses: This is a miscellaneous deduction on Schedule A for employment and outplacement agency fees, resume services, printing and mailing costs of search letters, want-ad placement fees, telephone calls, and travel expenses.
- State Sales Tax Deduction: The state and local tax deduction (SALT) allows you to deduct certain state taxes on your federal tax return if you choose to itemize. That includes property, income, and sales taxes.
- Moving Expenses for Military Members: Recently discharged military personnel can deduct unreimbursed moving expenses for up to one year after they leave the service. Active-duty service people can deduct moving expenses if they’re ordered to move.
Unclaimed Tax Credits That Boost Refunds
Certain tax credits can boost your income, so it’s prudent to claim them when possible. The following list is dependent upon your life circumstances. Read it carefully to see if you’re qualified for any of these:
- Earned Income Tax Credit (EITC): This is a credit designed specifically for low to moderate-income parents with qualifying children. You may qualify even if you can’t claim children on your tax return.
- Child and Dependent Care Credit: The Child and Dependent Care Credit is different from the EITC credit because it’s available to all taxpayers, regardless of income, with children under age seventeen.
- Savers Credit (Retirement Savings Contributions Credit): The Savers Credit is for individuals who contribute to traditional IRAs and employer-sponsored retirement plans. You must be a non-student over the age of eighteen.
- American Opportunity and Lifetime Learning Credit (AOTC): The AOTC Credit is for qualified education expenses the student incurs in the first four years of higher education. The maximum is $2,500 per year per eligible student.
- Energy-Efficient Home Improvement Credit: You may receive a tax credit for energy-efficient home improvements up to a certain amount. Contact our office about this one, calculating what’s eligible is complicated.
Industry-Specific and Niche Deductions
Some deductions are specific to certain industries or niches. This category also applies to independent contractors receiving 1099 income. Here are some examples:
- Self-Employment Deductions: Independent contractors pay the employer and the employee portions of their income tax. Fortunately, they can take self-employment deductions for health insurance, retirement plans, mileage, and other expenses.
- Educator Expenses Deduction: The IRS allows teachers to deduct educator expenses like books, classroom supplies, technology, and computer software used while teaching.
- Union Dues and Professional Fees: Labor unions ask for dues payments from their members. Those payments and the fees professionals pay for their licensing and certifications are deductible.
- Gambling Losses: Winnings are taxable income, so it makes sense that losses are deductible. Keep those losing scratch tickets so you can write off the expense.
Conclusion
Taxpayers can minimize their tax liability and boost returns by taking all available deductions and credits. You can accomplish this by keeping detailed records and receipts, reviewing tax information carefully, and consulting a professional before filing your return. Our office is standing by to assist you. Contact us today to learn more about how we can do that.
