Common Tax Deductions and Credits to Take Advantage Of

When it comes to reducing your tax burden, taking advantage of tax deductions and credits can make a significant difference. These tools are designed to lower your taxable income or provide a dollar-for-dollar reduction in your tax bill. However, many people overlook opportunities to save simply because they aren’t aware of what’s available or how to qualify.

In my experience, clients often feel overwhelmed by the complexity of tax planning. But once they understand the basics of deductions and credits, they’re empowered to make informed decisions that can lead to meaningful savings.

By the end of this article, you’ll understand:

• The difference between tax deductions and credits.
• Common deductions and credits you may qualify for.
• How to incorporate these savings into your broader financial plan.

Why Listen to Me?

As a CERTIFIED FINANCIAL PLANNER™ professional, I’ve worked with clients to identify tax-saving opportunities and align them with their financial goals. In my experience, understanding how to take advantage of deductions and credits can free up funds for other priorities, like investing or paying off debt.

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Key Takeaways

• Tax deductions lower your taxable income, while tax credits directly reduce your tax bill.
• Common deductions include mortgage interest, charitable contributions, and medical expenses.
• Credits like the Child Tax Credit and the American Opportunity Tax Credit provide significant savings for eligible taxpayers.

What Are Tax Deductions and Credits?

Tax Deductions

Deductions reduce your taxable income, which in turn lowers the amount of tax you owe. For example, if you’re in the 22% tax bracket, a $1,000 deduction saves you $220 in taxes.

Tax Credits

Credits provide a dollar-for-dollar reduction in your tax bill. For instance, a $1,000 tax credit reduces your tax bill by $1,000, regardless of your tax bracket.

Source: H&R Block

Common Tax Deductions

1. Mortgage Interest
If you own a home, you can deduct the interest paid on your mortgage, up to a loan value of $750,000. This deduction is especially valuable in the early years of your mortgage when payments are interest-heavy.
2. Charitable Contributions
In my experience, clients who itemize their deductions often benefit from donating to qualified charities. You can deduct cash contributions up to 60% of your adjusted gross income (AGI).

Pro Tip: Consider bunching contributions by donating multiple years’ worth of gifts in a single year to maximize the deduction.

3. Medical and Dental Expenses
You can deduct unreimbursed medical and dental expenses that exceed 7.5% of your AGI. This includes costs like doctor visits, prescriptions, and even mileage for medical appointments.
4. State and Local Taxes (SALT)
The SALT deduction allows you to deduct up to $10,000 in combined property taxes and state/local income or sales taxes.
5. Student Loan Interest
You can deduct up to $2,500 in student loan interest paid during the year, even if you don’t itemize.

Source: Common Tax Deductions

Common Tax Credits

1. Child Tax Credit (CTC)
The CTC provides up to $2,000 per qualifying child under 17, with $1,500 being refundable.
2. Earned Income Tax Credit (EITC)
The EITC is a refundable credit for low- to moderate-income taxpayers. The amount depends on your income, filing status, and number of dependents.
3. American Opportunity Tax Credit (AOTC)
This credit provides up to $2,500 per student for higher education expenses, including tuition, fees, and course materials.
4. Lifetime Learning Credit (LLC)
Unlike the AOTC, the LLC is available for a broader range of education expenses and is not limited to four years of study.
5. Residential Energy Credits
Tax credits are available for energy-efficient home improvements, such as solar panels or energy-efficient windows.

How to Maximize Tax Deductions and Credits

1. Keep Detailed Records
In my experience, many taxpayers miss out on deductions and credits simply because they don’t keep receipts or other documentation. Organize records for medical expenses, charitable contributions, and educational costs.
2. Use Tax-Advantaged Accounts
Contributions to accounts like HSAs, 401(k)s, and IRAs can lower your taxable income while helping you save for the future.
3. Work With a Professional
Tax laws are complex, and a professional can help identify deductions and credits you might not know about. They can also ensure compliance with IRS rules.
4. Review Your Filing Status
Married taxpayers can often save by filing jointly, but there are scenarios where filing separately is more advantageous.
5. Plan for Life Events
Life events like getting married, having a child, or buying a home can open the door to new deductions and credits. In my experience, proactive planning ensures you’re prepared to take full advantage.

Advanced Strategies

1. Tax-Loss Harvesting
If you have investments in taxable accounts, sell underperforming assets to offset capital gains and reduce your taxable income.
2. Bunching Deductions
If your itemized deductions are close to the standard deduction, consider bunching expenses like charitable contributions into a single year to maximize your tax benefit.
3. Maximize Retirement Savings
In addition to reducing your taxable income, retirement account contributions grow tax-deferred, providing long-term benefits.

FAQs About Tax Deductions and Credits

1. Can I Claim Both the AOTC and LLC?

No, you can only claim one education credit per student per year.

2. Do I Need to Itemize to Claim Deductions?

Some deductions, like mortgage interest and SALT, require itemizing. However, credits and certain deductions, like student loan interest, can be claimed without itemizing.

3. How Do Refundable vs. Non-Refundable Credits Work?

Refundable credits provide a refund even if your tax liability is zero, while non-refundable credits only reduce your tax bill to zero.

Conclusion

Tax deductions and credits are essential tools for reducing your tax burden and keeping more of your hard-earned money. By understanding the options available and incorporating them into your financial plan, you can make informed decisions that lead to meaningful savings.

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Disclaimer: Case studies are hypothetical and do not relate to an actual client of Lock Wealth Management. Clients or potential clients should not interpret any part of the content as a guarantee of achieving similar results or satisfaction if they engage Lock Wealth Management for investment advisory services.