If you are confused about the difference between a tax deduction and a tax credit, you are not alone. A deduction is subtracted from your income, lowering your taxable income and your income tax. But a tax credit kicks in after you have computed your income tax, reducing that income tax dollar-for-dollar.
You must choose between taking a standard deduction or itemizing your deductions. Since the standard deduction is now $12,400 per taxpayer, even more for seniors over 65, it won’t benefit most people to itemize unless they have a hefty home mortgage or huge medical expenses.
But even if you take the standard deduction, there still are a few deductions you can claim and many credits for which you might qualify. Here are some of the more popular ones.
Student loan interest deduction. You can deduct up to $2,500 of student loan interest if your income is less than $85,000 on a single return (double that if filing jointly.)
Educator expenses deduction. School teachers can deduct up to $250 they spend on classroom supplies.
HSA contributions deduction. For 2020, if you have high-deductible health coverage, you can contribute up to $3,550 to a Health Savings Account to pay for medical expenses ($7,100 for family coverage).
Retirement plan contributions. You may have a traditional 401(k) or other retirement account available to you at work, and all your contributions to the plan are tax-deductible up to $19,500 ($26,000 if you are 50 or older). Contributions to traditional IRAs or other individual retirement accounts are also deductible. You may also qualify for a Saver’s Credit of up to 50% of your first $2,000 in retirement plan contributions if your income is under $32,000.
Education tax credits. If you are paying for college for yourself or your kids, the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit LLC) may help. The AOTC credit is 100% of the first $2,000 you spend on education and 25% of the next $2,000. The LLC lets you claim 20% of the first $10,000 you paid toward tuition and fees. The AOTC cuts off at $90,000 of income at the LLC at $69,000.
Child credits. You’ll get a Child Tax Credit of $2,000 per child ($500 for non-child dependents) if your income is under $200,000 ($400,000 on a joint return.) For child and dependent care costs, you’ll get a credit of 20% to 35% of the first $3,000 of care costs, or double that if there are two or more dependents. If you adopt a child, you can claim credit for up to $14,300 of adoption costs per child if your income is under $254,520. And if your income is under $57,000, you may also qualify for an Earned Income Tax Credit of up to $6,660 depending on your marital status and how many kids you have.
Residential energy credit. If you installed solar equipment this year, you may qualify for a tax credit of 26% of the cost. In 2021, the final year, the credit is reduced to 22%.
Related: Five Hidden Ways to Boost Your Tax Refund
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