What Are Tax Credits and Tax Deductions?

The information in this article is up to date for tax year 2023 (taxes filed in 2024). 

Tax credits and tax deductions are two different types of tax breaks. Both can lower your tax bill, but they work in different ways.      

What is a tax deduction?    

A tax deduction is an expense you can subtract from your yearly income. Deductions are taken before you calculate how much of your income is taxable. That means you should subtract any tax deductions from your income before you calculate your tax bill. 

What is the standard deduction?    

The standard deduction is a set dollar amount that the IRS allows you to subtract from the income you report. Most taxpayers are eligible, and you don’t need to keep track of any receipts or records to take this write-off. The amount of the standard deduction depends on a few factors:   

  1. Your filing status   
  1. Your age (and your spouse’s age if applicable)    
  1. Whether you or your spouse are blind   
  1. Whether you can be claimed as a dependent on someone else’s tax return   

How much is the standard deduction in 2024? 

Here are the most up to date standard deduction amounts for tax year 2023 (returns filed in 2024).     

Filing Status    Standard Deduction    
Single    $13,850     
Married Filing Separately    $13,850     
Married Filing Jointly    $27,700    
Qualifying Widow(er)    $27,700    
Head of Household    $20,800 

Taxpayers over age 65 or who are blind are eligible for an additional $1,850. On the other hand, taxpayers who can be claimed as a dependent on someone else’s tax return may receive a lower standard deduction.   

What are itemized deductions?   

Itemized deductions are specific expenses you can write off if you are not taking the standard deduction. These deductions are reported on Schedule A of Form 1040.  It’s good to itemize if your total deductions exceed your standard deduction amount or if you don’t qualify for the standard deduction. Itemizing is slightly more complicated because you must keep detailed records of the expenses you claim on your tax return.    

Examples of itemized deductions:   

  • Business travel expenses – Work-related travel expenses include transportation, lodging and meals, shipping and baggage, laundry, and dry cleaning.   
  • Casualty, disaster, and theft loss – If you were impacted by a federally declared disaster, you could claim the loss relating to your home, household items, and vehicles on your federal income tax return.  
  • Business use of your home or car – If you are a W-2 employee, you cannot deduct your home office, as the Tax Cuts and Jobs Act eliminated the unreimbursed employee expenses deduction in 2018. However, you may qualify for tax breaks for dedicated home office space if you are self-employed.   
  • Charitable gifts – Qualified organizations include charity groups like Goodwill and the Salvation Army as well as religious and educational groups. If you qualify, you can deduct the fair market value of contributions on your return.   
  • Home mortgage interest – The IRS incentivizes homeowners by allowing a deduction on interest paid on qualifying mortgage loans.   
  • Medical & dental expenses – Out-of-pocket or unreimbursed medical and dental expenses like preventative care, treatment expenses, and prescription medications are eligible expenses to claim as itemized deductions.   

What is a tax credit?   

A tax credit is a dollar-for-dollar amount that can be subtracted from your tax bill once you’ve calculated how much you owe for income tax.    

A credit will fall into one of two categories:  

  • Non-refundable tax credit: A credit that can bring your tax bill down to $0. But any remaining credit does not come back to you in your refund. Example: Adoption Tax Credit   
  • Refundable tax credit: If the amount of credit is greater than what you owe for taxes, you receive the remaining portion of your refund. Example: Earned Income Tax Credit (EITC)   

Refundable tax credits are a larger benefit because if the credit you claim is more than your total tax bill, you can keep the difference.   

Is a tax credit or a tax deduction better?   

One isn’t necessarily better than the other. A tax break is a tax break, and every little bit helps.  

TaxSlayer finds any and all possible tax breaks for you. We do the work, so you can be sure you’re getting the maximum refund – guaranteed.   

Should I itemize or take the standard deduction?

The answer to this question depends on your specific financial situation. For example, if you have out-of-pocket medical expenses, a mortgage, or make student loan payments, it might be in your best interest to itemize your deductions.  

Still need help determining if you should itemize deductions? TaxSlayer can help – our program will automatically calculate your itemized deductions, compare them against your standard deduction, and use whichever is most beneficial to your tax return.  

Learn more: What is Itemizing and Who Should Do It? 

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