Tax credits and deductions change the amount of a person’s tax bill or refund. People should understand which credits and deductions they can claim and the records they need to show their eligibility.
Tax credits
A tax credit reduces the income tax bill dollar-for-dollar that a taxpayer owes based on their tax return.
Some tax credits, such as the Earned Income Tax Credit, are refundable. If a person’s tax bill is less than the amount of a refundable credit, they can get the difference back in their refund.
To claim a tax credit, people should:
• Keep records to show their eligibility for the tax credits they claim.
• Check now to see if they qualify to claim any credits next year on their tax return.
Deductions
Deductions can reduce the amount of a taxpayer’s income before they calculate the tax they owe.
Most people take the standard deduction. The standard deduction changes each year for inflation. The amount of the standard deduction depends on a taxpayer’s filing status, age and whether they’re blind and whether the taxpayer is claimed as a dependent by someone else.
Some people must itemize their deductions, and some people may choose to do so because it reduces their taxable income more than the standard deduction. Generally, if a taxpayer’s itemized deductions are larger than their standard deduction, it makes sense for them to itemize.
Interactive Tax Assistant
Find help with tax questions based on specific circumstances with the Interactive Tax Assistant. It can help a person decide if they’re eligible for many popular tax credits and deductions.
More information:
• Tax credits for individuals: What they mean and how they can help refunds
• Deductions for individuals: What they mean and the difference between standard and itemized deductions
Tag: standard deduction
It’s important for taxpayers to know the difference between standard and itemized deductions
Taxpayers have two options when completing a tax return, take the standard deduction or itemize their deductions. Most taxpayers use the option that gives them the lowest overall tax.
Due to all the tax law changes in the recent years, including increases to the standard deduction, people who itemized in the past might want to switch to the standard deduction.
Here are some details about the two options.
Standard deduction
The standard deduction amount increases slightly every year and varies by filing status. The standard deduction amount depends on the taxpayer’s filing status, whether they are 65 or older or blind, and whether another taxpayer can claim them as a dependent. Taxpayers who are age 65 or older on the last day of the year and don’t itemize deductions are entitled to a higher standard deduction.
Most filers who use Form 1040 can find their standard deduction on the first page of the form. The standard deduction for most filers of Form 1040-SR, U.S. Tax Return for Seniors, is on page 4 of that form.
Not all taxpayers can take a standard deduction, which is discussed in the Instructions for Forms 1040 and 1040-SR. Those taxpayers include:
• A married individual filing as married filing separately whose spouse itemizes deductions—if one spouse itemizes on a separate return, both must itemize.
• An individual who files a tax return for a period of less than 12 months. This is uncommon and could be due to a change in their annual accounting period.
• An individual who was a nonresident alien or a dual-status alien during the year. However, nonresident aliens who are married to a U.S. citizen or resident alien can take the standard deduction in certain situations.
Itemized deductions
Taxpayers choose to itemize deductions by filing Schedule A, Form 1040, Itemized Deductions. Itemized deductions that taxpayers may claim include:
• State and local income or sales taxes
• Real estate and personal property taxes
• Home mortgage interest
• Mortgage insurance premiums on a home mortgage
• Personal casualty and theft losses from a federally declared disaster
• Gifts to a qualified charity
• Unreimbursed medical and dental expenses that exceed 7.5% of adjusted gross income
Some itemized deductions, such as the deduction for taxes, may be limited. Taxpayers should review the instructions for Schedule A Form 1040 for more information on limitations.