Tax Deductions Guide and 20 Popular Breaks for 2018
A deduction cuts the amount of income you’re taxed on, which can mean a lower bill. But a credit cuts your tax bill directly.
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Tax deductions and tax credits can be huge money-savers — if you know what they are, how they work and how to pursue them. Here’s a cheat sheet.
What is a tax deduction?
A tax deduction is a dollar amount that the IRS allows you to subtract from your adjusted gross income, or AGI, making your taxable income lower. The lower your taxable income, the lower your tax bill.
What is a tax credit, then?
A tax credit 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.)
As the simplified example in the table shows, a tax credit can make a much bigger dent in your tax bill than a tax deduction.
* Example rate only. The United States uses a progressive tax system.
Would you rather have:
| Your AGI | $100,000 | $100,000 |
| Less: tax deduction | ($10,000) | |
| Taxable income | $90,000 | $100,000 |
| Tax rate* | 25% | 25% |
| Calculated tax | $22,500 | $25,000 |
| Less: tax credit | ($10,000) | |
| Your tax bill | $22,500 | $15,000 |
How to 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
The standard deduction basically is a flat-dollar, no-questions-asked reduction in your AGI. The amount you qualify for depends on your filing status.
| Filing status | 2018 tax year | 2017 tax year |
| Single | $12,000 | $6,350 |
| Married, filing jointly | $24,000 | $12,700 |
| Married, filing separately | $12,000 | $6,350 |
| Head of household | $18,000 | $9,350 |
People over age 65 or who are blind get a bigger standard deduction.
Itemizing deductions
Itemizing lets 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.
Should you itemize or take the standard deduction?
Here’s what the choice boils down to:
If your standard deduction is less than the sum of your itemized deductions, you probably should itemize and save money. Beware, however, that itemizing usually takes more time, and you’ll need to have proof that you’re entitled to the deductions.
If your standard deduction is more than the sum of your itemized deductions, it might be worth it to take the standard deduction (and the process is faster).
Note: The standard deduction went up in 2018, so you might find that it’s the better option for this year even if you itemized last year.
Your tax software or tax advisor can run your return both ways to see which method produces a lower tax bill.
20 popular tax deductions and tax credits for individuals
There are hundreds of deductions and credits out there. Here’s a drop-down list of some common ones, as well as links to our other content that will help you learn more.