Tax Credits and Deductions

Two ways to reduce the amount of taxes you owe are tax credits and deductions. Tax credits directly lower your tax bill, while deductions reduce your taxable income.

Tax Credits

Some common tax credits include:

• Earned Income Tax Credit (EITC): A credit for low-income individuals and families who have earned income. The credit amount depends on the taxpayer's income and number of children.
• Child Tax Credit: A credit for taxpayers who have children under 17 years old. The credit amount depends on the number of children and the taxpayer's income.
• American Opportunity Tax Credit: A credit for taxpayers who are pursuing higher education. The credit can cover up to $2,500 of qualified education expenses.
• Lifetime Learning Credit: A credit for taxpayers who are pursuing higher education but do not qualify for the American Opportunity Tax Credit. The credit can cover up to $2,000 of qualified education expenses.

Deductions

Some common deductions include:

• Standard deduction: A deduction available to taxpayers who do not itemize their deductions. The amount varies depending on the taxpayer's filing status.
• State and local taxes: Taxpayers can deduct state and local income, sales, and property taxes up to a certain amount.
• Mortgage interest: Taxpayers can deduct interest paid on a mortgage for their primary residence.
• Charitable contributions: Taxpayers can deduct donations made to qualified charitable organizations.

It is important to note that there may be limitations and exceptions to these credits and deductions. For example, some credits are only available to taxpayers who meet certain income thresholds or who have specific expenses. It is recommended to consult with a tax professional to determine which credits and deductions apply to your specific situation.