What Are Tax Credits & Deductions For Individual Income Taxpayers
According to the IRS, tax credits and tax deductions are two ways to reduce a tax bill. Still, they work differently: For individual tax credits are amounts that can be deducted directly from taxes owed to the IRS. Some credits are refundable (e.g., Earned Income Tax Credit), meaning you can get a refund even if you don’t owe any taxes. Others are non-refundable and can only reduce your tax liability to zero. Yet, some are partially refundable. Typical credits allowed, for example, on Form 1040 include Child Tax Credit (CTC,) line 13; on Form 8962, Premium Tax Credit (PTC,) line 12-15; on Form 8863, Education Credits, and the American Opportunity Tax Credit (AOTC,) and Lifetime Learning Credit (LLC): Lines 5-7.
For individual taxpayers a tax deduction reduces the amount of income that is subject to tax. There are two main types of deductions: the standard deduction and itemized deductions. The standard deduction is a fixed amount that reduces the taxable income, based on an individual’s filing status (e.g., single, married filing jointly). Itemized deductions are specific expenses deductible, such as mortgage interest, medical expenses, and charitable contributions. It is advantageous to the taxpayer to choose itemized deductions if their itemized deductions total more than their standard deduction. On Form 1040, Standard Deduction is allowed on line 12; on Schedule A of Form 1040, Itemized Deductions, for example, medical and dental expenses, line 1, and mortgage interest, line 8, and Above-The-Line-Deductions (specific expenses, available to all taxpayers, regardless of whether they itemize their deductions or take the standard deduction, that can be subtracted from gross income to arrive at adjusted gross income (AGI),) for example, educator expenses, for teachers and educators, that include classroom supplies and materials, up to $300, line 11, and self-employment tax deduction; IRA contributions, line15, etc.
| Tax Credits/Deductions Allowed for 2024/2025 | |
| Tax Credit/Deduction | 2024-2025 Amount |
| Standard Deduction | $14,600 (Single) |
| $29,200 (Married) | |
| Child Tax Credit | $2,000 per child |
| Child & Dependent Care Credit | Up to $6,000 for one qualifying individual, $12,000 for two or more |
| Earned Income Tax Credit (EITC) | Up to $7,430 for one qualifying child, $7,850 for two or more |
| American Opportunity Tax Credit (AOTC) | Up to $2,500 per eligible student |
| Lifetime Learning Credit (LLC) | Up to $2,000 per tax return |
| Residential Energy Efficient Property Credit | 30% of qualified expenses |
| Mortgage Interest Deduction | Up to $750,000 of mortgage debt |
| Medical and Dental Expenses | Deductible if they exceed 7.5% of AGI |
| State and Local Taxes (SALT) Deduction | Up to $80,000 |
| Charitable Contributions | Up to 60% of AGI |
| Casualty and Theft Losses | Deductible if they exceed $100 and 10% of AGI |
| Job Expenses and Certain Miscellaneous Deductions | Subject to limitations |
| Student Loan Interest Deduction | Up to $2,500 |
| Educator Expenses | Up to $300 |
| Contributions to Traditional IRAs | Up to $6,000 |
| Health Savings Account (HSA) Contributions | Up to $4,150 |
| Self-Employment Expenses | Deductible |
Both tax deductions and tax credits help to reduce the tax burden, but they work differently and have distinct advantages. Consider a taxpayer with a taxable income of $60,000 and eligible for a $5,000 tax deduction and a $5,000 tax credit, where the taxpayer can opt to claim the tax deduction alone, the tax credits alone, or both the credit and the deduction.
Scenario 1: Taking Only the $5,000 Tax Deduction
- Original Taxable Income: $60,000
- Tax Deduction: $5,000
- New Taxable Income: $55,000
- Tax Liability: Assuming a tax rate of 22%, $$ 55,000 * 0.22 = 12,100 $$
- Tax Savings: $$ 60,000 \times 0.22 – 12,100 = 1,100 $$
Scenario 2: Taking Only the $5,000 Tax Credit
- Original Taxable Income: $60,000
- Tax Liability Before Credit: Assuming a tax rate of 22%, $$ 60,000 * 0.22 = 13,200 $$
- Tax Credit: $5,000
- New Tax Liability: $$ 13,200 – 5,000 = 8,200 $$
- Tax Savings: $$ 5,000 $$
Scenario 3: Taking Both the $5,000 Tax Deduction and the $5,000 Tax Credit
- Original Taxable Income: $60,000
- Tax Deduction: $5,000
- New Taxable Income: $55,000
- Tax Liability Before Credit: Assuming a tax rate of 22%, $$ 55,000 * 0.22 = 12,100 $$
- Tax Credit: $5,000
- New Tax Liability: $$ 12,100 – 5,000 = 7,100 $$
- Total Tax Savings: $$ (60,000 \times 0.22 – 12,100) + 5,000 = 1,100 + 5,000 = 6,100 $$
In summary, a deduction-only claim reduces tax liability to $12,100, saving $1,100; a credit-only claim reduces tax liability to $8,200, saving $5,000; and both a deduction and credit claim reduces tax liability to $7,100, saving $6,100.
Comparison With 2023-2024 Tax Season
| Tax Credits/Deductions Comparison 2024/2025 with 2023/2024 | ||
| Tax Credit/Deduction | 2024-2025 Amount | 2023-2024 Amount |
| Standard Deduction | $14,600 (Single) | $13,850 (Single) |
| $29,200 (Married) | $28,700 (Married) | |
| Child Tax Credit | $2,000 per child | $2,000 per child |
| Child & Dependent Care Credit | Up to $6,000 for one qualifying individual, $12,000 for two or more | Up to $6,000 for one qualifying individual, $12,000 for two or more |
| Earned Income Tax Credit (EITC) | Up to $7,430 for one qualifying child, $7,850 for two or more | Up to $7,000 for one qualifying child, $7,300 for two or more |
| American Opportunity Tax Credit (AOTC) | Up to $2,500 per eligible student | Up to $2,500 per eligible student |
| Lifetime Learning Credit (LLC) | Up to $2,000 per tax return | Up to $2,000 per tax return |
| Residential Energy Efficient Property Credit | 30% of qualified expenses | 30% of qualified expenses |
| Mortgage Interest Deduction | Up to $750,000 of mortgage debt | Up to $750,000 of mortgage debt |
| Medical and Dental Expenses | Deductible if they exceed 7.5% of AGI | Deductible if they exceed 7.5% of AGI |
| State and Local Taxes (SALT) Deduction | Up to $80,000 | Up to $80,000 |
| Charitable Contributions | Up to 60% of AGI | Up to 60% of AGI |
| Casualty and Theft Losses | Deductible if they exceed $100 and 10% of AGI | Deductible if they exceed $100 and 10% of AGI |
| Job Expenses and Certain Miscellaneous Deductions | Subject to limitations | Subject to limitations |
| Student Loan Interest Deduction | Up to $2,500 | Up to $2,500 |
| Educator Expenses | Up to $300 | Up to $300 |
| Contributions to Traditional IRAs | Up to $6,000 | Up to $6,000 |
| Health Savings Account (HSA) Contributions | Up to $4,150 | Up to $3,850 |
| Self-Employment Expenses | Deductible | Deductible |
2024/2025 Tax Credits & Deductions, Advantages and Disadvantages for Income Taxpayers Relative to 2023/2024
Tax credits and deductions changes for the 2024/2025 period over the 2023/2024 period offer some advantages and disadvantages. Advantages include an increase in the standard deduction for 2024/2025. It’s now $15,000 for single taxpayers, up from $14,600 in 2023/20241. The maximum Higher Earned Income Tax Credit (EITC) amount has increased, providing more support to low-income families. The contribution limits for Health Savings Accounts (HAS) have risen, allowing individuals to save more for medical expenses. Lastly, the monthly limitation for qualified transportation fringe benefits has increased.
Disadvantages include complexity due to the introduction of new credits and deductions, the tax filing process may become more unfamiliar to some, requiring careful attention to detail. Increased complexity can lead to a higher chance of errors in tax filings, which might result in audits or penalties. Some of the changes are temporary, such as the increased Child Tax Credit, set to expire after 2025, which may create uncertainty for future tax planning.
Notes
Tax Credits are typically registered on specific lines, called line items, of Form 1040, Form 8962, and Form 8863:
Form 1040 (U.S. Individual Income Tax Return):
- Child Tax Credit (CTC): Line 13
- Child & Dependent Care Credit (CDCC): Line 49
- Earned Income Tax Credit (EITC): Line 19
- American Opportunity Tax Credit (AOTC): Line 30
- Lifetime Learning Credit (LLC): Line 30
- Premium Tax Credit (PTC): Line 29
- Adoption Credit: Line 19
- Saver’s Credit: Line 19
- Energy Efficient Home Improvement Credit: Line 22
- Residential Clean Energy Property Credit: Line 22
Form 8962 (Premium Tax Credit):
- Premium Tax Credit (PTC): Lines 12-15
Form 8863 (Education Credits):
- American Opportunity Tax Credit (AOTC): Lines 2-4
- Lifetime Learning Credit (LLC): Lines 5-7
Tax deductions are typically registered as line items of Form 1040:
Form 1040 (U.S. Individual Income Tax Return):
- Standard Deduction: Line 12
- Itemized Deductions (Schedule A):
- Medical and Dental Expenses: Line 1
- State and Local Taxes (SALT): Line 5
- Mortgage Interest: Line 8
- Charitable Contributions: Line 11
- Casualty and Theft Losses: Line 15
- Job Expenses and Certain Miscellaneous Deductions: Line 16
- Above-the-Line Deductions:
- Educator Expenses: Line 11
- Certain Business Expenses of Reservists, Performing Artists, and Fee-Basis Government Officials: Schedule 1, Line 11
- Health Savings Account (HSA) Deduction: Schedule 1, Line 13
- Moving Expenses for Armed Forces Members: Schedule 1, Line 14
- Self-Employment Tax Deduction: Schedule 1, Line 15
- Self-Employed Health Insurance Deduction: Schedule 1, Line 16
- Penalty on Early Withdrawal of Savings: Schedule 1, Line 17
- Alimony Paid: Schedule 1, Line 18
- IRA Deduction: Schedule 1, Line 19
- Student Loan Interest Deduction: Schedule 1, Line 20
Above-the-line deductions are specific expenses that can be subtracted from gross income to arrive at adjusted gross income (AGI). These deductions are available to all taxpayers, regardless of whether they itemize their deductions or take the standard deduction. By reducing the AGI, above-the-line deductions can lower the taxable income and potentially make the taxpayer eligible for other tax credits and deductions with income limits.
Common Above-the-Line Deductions:
- Educator Expenses: Deduction for teachers and educators for classroom supplies and materials, up to $300.
- Certain Business Expenses of Reservists, Performing Artists, and Fee-Basis Government Officials: Deduction for specific work-related expenses.
- Health Savings Account (HSA) Contributions: Deduction for contributions to an HSA, up to $4,150 for 2024-2025.
- Moving Expenses for Armed Forces Members: Deduction for moving expenses for active-duty members of the Armed Forces.
- Self-Employment Tax Deduction: Deduction for the employer portion of self-employment tax.
- Self-Employed Health Insurance Deduction: Deduction for health insurance premiums paid by self-employed individuals.
- Penalty on Early Withdrawal of Savings: Deduction for penalties paid for early withdrawal of savings.
- Alimony Paid: Deduction for alimony payments under agreements made before 2019.
- IRA Contributions: Deduction for contributions to traditional IRAs, up to $6,000 for 2024-2025.
- Student Loan Interest Deduction: Deduction for interest paid on student loans, up to $2,500.
These deductions are found on Schedule 1 of Form 1040 and are subtracted from gross income to calculate AGI. They are often referred to as “above-the-line” because they are taken before the line that determines AGI, distinguishing them from itemized deductions, which are taken after AGI is calculated.
Conclusion
For individuals, tax credits and deductions are tools to reduce tax bills, but they function differently. Tax credits directly lower the taxes owed, with some being refundable (like the Earned Income Tax Credit) that can result in refunds even if no taxes are owed, while others are non-refundable or partially refundable. Tax deductions reduce taxable income, with options including the standard deduction (a fixed amount based on filing status) and itemized deductions (specific expenses like mortgage interest, medical costs, and charitable donations).
For 2024/2025, changes aim to provide more financial relief but require careful navigation. Advantages include increased standard deductions ($15,000 for single taxpayers, up from $14,600 in 2023/2024), higher Earned Income Tax Credits, and raised Health Savings Account contribution limits.
Disadvantages include increased complexity, which may lead to more errors and potential audits. Some changes, like the expanded Child Tax Credit, are temporary and set to expire after 2025, creating future tax planning uncertainty.
Overall, while these changes offer benefits, they also add complexity to the tax filing process.
Other Sources
Tax Credits
Tax Credits vs Tax Deductions: What is the Difference and Which is Better? https://youtu.be/farYRlDMk_M
10 Best Tax Credits (IRS Approved): https://youtu.be/G1vZgnLuVXg
The Premium Tax Credit – The basics: https://www.irs.gov/affordable-care-act/individuals-and-families/the-premium-tax-credit-the-basics
About Form 8962, Premium Tax Credit: https://www.irs.gov/forms-pubs/about-form-8962
American Opportunity Tax Credit: https://www.irs.gov/credits-deductions/individuals/aotc
About Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits): https://www.irs.gov/forms-pubs/about-form-8863
Lifetime Learning Credit: https://www.irs.gov/credits-deductions/individuals/llc
About Publication 503, Child and Dependent Care Expenses: https://www.irs.gov/forms-pubs/about-publication-503
Publication 968, Tax Benefits for Adoption: https://www.irs.gov/pub/irs-prior/p968–2002.pdf
Publication 590-A. Contributions to Individual Retirement Arrangements (IRAs): https://www.irs.gov/pub/irs-pdf/p590a.pdf
Publication 596, Earned Income Credit (EIC): https://www.irs.gov/pub/irs-pdf/p596.pdf
Publication 523, Selling Your Home: https://www.irs.gov/pub/irs-pdf/p523.pdf
About Publication 550, Investment Income and Expenses: https://www.irs.gov/pub/irs-pdf/p550.pdf
Tax Deductions
What are Tax Write-Offs? Tax Deductions Explained by a CPA! https://youtu.be/yGQ79M7nIyI
Itemized Deduction vs. Standard Deduction, Explained: https://youtu.be/2LmBSfomk2Q
Tax Credits vs Tax Deductions
Tax Credits vs Tax Deductions: What is the Difference and Which is Better? https://youtu.be/farYRlDMk_M
Changes 2025
IRS releases tax inflation adjustments for tax year 2025: https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025
New Tax Credits and Deductions: https://americantaxservice.org/new-tax-deductions/
Legislation and Regulations
TITLE 26-INTERNAL REVENUE CODE: https://uscode.house.gov/browse/prelim@title26&edition=prelim
Tax Cuts and Jobs Act (TCJA): https://www.congress.gov/115/statute/STATUTE-131/STATUTE-131-Pg2054.pdf
American Rescue Plan Act (ARPA): https://www.govinfo.gov/content/pkg/PLAW-117publ2/pdf/PLAW-117publ2.pdf
Inflation Reduction Act (IRA): https://www.govinfo.gov/content/pkg/PLAW-117publ169/pdf/PLAW-117publ169.pdf
