When talking about ways to reduce the amount of tax owed, 2 topics come up – tax deductions and tax credits. These are both ways to reduce the amount of tax you will end up owing, but they reduce tax in very different ways.
Tax Deductions
A tax deduction (sometimes also called a “tax write-off”) reduces the amount of income you earned that is subject to tax. There are many different types of deductions that can be taken – the most common choice that every individual ends up making is whether to tax the Standard Deduction or to Itemize Deductions.
Standard Deduction
The Standard Deduction is designed to help you reduce the amount of income you have to pay tax on, without having to prove a bunch of other deductible expenses to make Itemizing worthwhile.
The standard deduction for married couples filing jointly for tax year 2024 is $29,200, an increase of $1,500 from tax year 2023. For single taxpayers and married individuals filing separately, the standard deduction is $14,600 for 2024, an increase of $750 from 2023; and for heads of households, the standard deduction will be $21,900 for tax year 2024, an increase of $1,100 from the amount for tax year 2023. What this means is if you make less than the standard deduction amount (for your filing status), you won’t pay federal income tax. If you make more than the standard deduction, your taxable income will be reduced by the standard deduction amount, unless you can benefit by itemizing.
If you file as married filing jointly, and have $50,000 of income and choose the standard deduction, here’s what that math might look like:
| Gross Income | $50,000 |
| – Standard Deduction | ($29,200) |
| Taxable Income | $20,800 |
This means only $20,800 of your income will be subject to income tax, rather than the full $50,000.
Itemized Deductions
Itemized deductions is an alternative to the standard deduction, where you can claim specific reductions from your income. This generally is a little more work, but if you can itemize more than your standard deduction, it’s generally worth it.
Some things you can itemize include:
In short, if you have enough of these items to justify itemizing, you should bring this to the attention of your tax professional, or do more research within the instructions for Schedule A to determine whether or not what you have is deductible.
Tax Credits
Tax Credits reduce the amount of tax owed directly, rather than reducing the amount of income you have that is subject to tax. This may sound like a minor distinction, but it becomes important.
A $600 Tax Credit is much more valuable than a $600 Tax Deduction. It’s easier to explain with a formula:
Gross Income
– Deductions
= Taxable Income
x Tax Rate
= Tax Owed
– Tax Credits and Tax Payments
= Tax Due or Tax Refund Due
Tax Credits generally reduce your tax directly as though you made it as a payment toward your tax owed. There are different types of credits – refundable and non-refundable. Non-refundable credits cannot generate a refund – so if you receive a $600 non-refundable credit but only had $500 of tax owed, you won’t get that $100 back – but any tax payments that you made during the year can be refunded. A refundable credit can generate a refund – so in the same scenario, you would get that $100 back.
Summary
In general, a Tax Credit is going to be more valuable than a Tax Deduction of the same amount, but everyone’s tax situation is different. You can learn more about the types of credits and deductions available from the IRS here: Credits and deductions for individuals | Internal Revenue Service (irs.gov)
If you need to learn more about the taxes and credits available for your tax situation, JCT Tax Solutions is here to help. We’ll automatically try to find as many ways to reduce your taxable income as possible during our tax prep services, or we can do a tax planning session to help figure out what your tax situation looks like. Visit the Contact Us page to get started today!
