Popular Tax Deductions and Tax Breaks for 2023-2024 - Part 2

A deduction cuts the income you're taxed on, which can mean a lower bill. A credit cuts your tax bill directly. Learn more about common tax breaks and how to claim them. Last week, we looked at some of the most popular tax breaks for the 2024 filing season. This week we will discuss some additional breaks and learn more about the definitions of tax deductions and tax write-offs and how to claim them.

15. Saver’s credit
The saver's credit runs 10% to 50% of up to $2,000 ($4,000 if filing jointly) in contributions to an IRA, 401(k), 403(b) or certain other retirement plans. The percentage depends on your filing status and income.

16. Health savings account contributions deduction
Contributions to HSAs are tax-deductible, and the withdrawals are tax-free, too, as long as you use them for qualified medical expenses.

17. Self-employment expenses deduction
There are many valuable self-employment tax write-offs for freelancers, contractors and other self-employed people.

18. Home office deduction
If you use part of your home regularly and exclusively for business-related activity, the IRS lets you write off certain home office deductions for associated rent, utilities, real estate taxes, repairs, maintenance and other related expenses.

19. Educator expenses deduction
If you’re a school teacher or other eligible educator, you can deduct up to $300 spent on classroom supplies. Spouses who are both educators and file jointly get a deduction of $300 each, making them eligible to claim up to $600 on their return.

20. Solar tax credit
The solar tax credit, also known as the "residential clean energy credit," can get you up to 30% of the installation cost of solar energy systems, including solar water heaters and solar panels.

21. Energy efficient home improvement tax credit
The energy efficient home improvement tax credit, revamped under the Inflation Reduction Act, allows homeowners who purchased qualifying home upgrades, such as energy-efficient window, doors and heat pumps, to recoup up to $3,200 on those investments when they file their tax returns.

22. Electric vehicle tax credit
The nonrefundable EV tax credit ranges from $3,750 to $7,500 for tax year 2023. Taxpayers can also get a credit of up to $4,000 for used cars. Eligibility depends on a number of rules, including income, price of the vehicle and whether the car meets IRS manufacturing guidelines for qualified EVs.

What are tax deductions?
A tax deduction or tax write-off lowers your taxable income and thus reduces your tax liability. You subtract the amount of the tax deduction from your income, making your taxable income lower. The lower your taxable income, the lower your tax bill. The IRS allows taxpayers to lower their taxable income by choosing either the standard deduction or itemized deductions. Before that, you can also make certain adjustments to your gross income by taking above-the-line deductions in order to arrive at what's called your adjusted gross income.

Above-the-line deductions
Contributions to a retirement account, health savings account contributions or student loan interest payments are referred to as "above-the-line" deductions, but it may be easier to think of them as "adjustments" to your income. These deductions are subtracted from your gross income to determine your adjusted gross income, or AGI. If you qualify, you can take them regardless of whether you itemize or take the standard deduction. Your AGI is important because it is the starting point for calculating your tax bill and also the basis on which you might qualify for many deductions and credits.

Below-the-line deductions
Below-the-line deductions, on the other hand, are qualified expenses that are subtracted from your adjusted gross income to help determine your taxable income. The IRS lets you take either the standard deduction or itemize. There are dozens of itemized deductions available to taxpayers and all of them have different rules. Examples of itemized deductions include deductions for unreimbursed medical expenses, charitable donations, and mortgage interest. Whether you choose to itemize or take the standard deduction depends largely on which route will save you more money.

What are tax write-offs?
The IRS doesn't use the term "tax write-offs" anywhere in the Internal Revenue Code, but the phrase has gained popularity as a synonym for "tax deduction" over the years. If you hear someone talking about a tax write-off, they're probably referring to certain qualified expenses — or deductions — that itemizers can take to lower their taxable income.

A tax credit, on the other hand, is a dollar-for-dollar reduction in your actual tax bill. A few credits are refundable, which means if you owe $250 in taxes but qualify for a $1,000 credit, you’ll get a check for the difference of $750. Most tax credits, however, aren’t refundable.

A tax credit can make a much bigger dent in your tax bill than a tax deduction, and you don't have to itemize to claim a credit.

How do you claim tax deductions?
Generally, there are two ways to claim tax deductions: Take the standard deduction or itemize deductions. You can’t do both.

The standard deduction is a flat-dollar, no-questions-asked reduction in your adjusted gross income. The amount you qualify for depends on your filing status. People 65 or older, or who are blind, get a bigger standard deduction.

Itemized deductions let you cut your taxable income by taking any of the hundreds of available tax deductions you qualify for. The more you can deduct, the less you’ll pay in taxes.

The standard deduction has gone up significantly in recent years, so you might find that it's the better option for you now even if you've itemized in the past. Your tax software or tax preparer can run your return both ways to see which method produces a lower tax bill.

(Partially reprinted from www.nerdwallet.com)