No one wants to pay more in federal taxes than they have to—and you shouldn't. There are 2 things that help determine what you really owe: tax deductions and tax credits.
What is a tax credit?
A tax credit is an amount that can be subtracted directly from your tax bill or, in some cases, added to your tax refund. For example, if you have a $1,000 bill and claim a $250 credit, you owe $750.
What is a tax deduction?
A tax deduction lowers your taxable income. And lower income = lower taxes. If you claim a $1,000 deduction, it means you don't pay tax on that $1,000. If you're in the 22% federal tax bracket, you just saved $220. Unlike tax credits, which you can claim no matter how you file your taxes, each year you have to decide whether to itemize your tax deductions on the Form 1040 Schedule A (a mouthful) or take what's called the standard deduction.
The standard deduction is a dollar amount set annually by the IRS that is subtracted from your gross income. For tax year 2022, the standard deduction is $12,950 for single filers and married couples filing separately, $19,400 for heads of household, and $25,900 for married couples filing jointly and qualifying widow(er)s.1 So if a single filer earned $50,000 in 2022, they can subtract $12,950 from their income, and their federal income taxes will be calculated based on $37,050 of taxable income. If a filer can claim deductions—like the ones we'll tell you about below—that add up to more than their standard deduction, they may instead choose to itemize. That's individually listing out their deductions rather than taking the standard deduction to lower their taxable income by that larger amount. If your itemized deductions would add up to less than the standard deduction, itemizing might not benefit you.
Depending on whether you itemize or take the standard deduction, here are 11 tax breaks that could potentially lower your final tax bill or increase your refund. Just remember, many deductions and credits have eligibility requirements based on your income, filing status, and other factors, so review IRS guidelines and consult with a tax advisor on your personal situation.
Whether you itemize or not:
1. Kids and dependents credits
If you're financially responsible for a child, relative, or other person, these dependents could lower your tax bill or even raise your refund amount.
The Child Tax Credit and Credit for Other Dependents allow you to claim tax credits for each of your qualifying dependents. If your modified adjusted gross income (MAGI)—your gross income with certain adjustments—is under $400,000 if filing jointly or $200,000 with any other filing status for 2022, this could mean $2,000 per child under 17 (at the end of 2022) or $500 per other dependent. But if your MAGI is over those amounts, you might still qualify for a partial credit.
The Child and Dependent Care Credit covers childcare expenses, or the care of a spouse or parent who isn't mentally or physically able to care for themselves, while you work or look for work. It's worth up to $1,050 for one child or dependent, or up to $2,100 for 2 or more children or dependents, depending on your income.
If you've adopted a child and incurred adoption costs, the Adoption Credit can get you up to $14,890 back on your taxes for that tax year if you're within income limits.
2. Retirement savings deductions and credits
Saving for your future self can pay off sooner than you'd think.
First, any pre-tax contributions you make to a workplace retirement account, such as a 401(k) or 403(b), may lower your taxable income. If you contribute to a traditional IRA and make less than the income limit, you may be able to deduct those contributions at tax time too, depending on your filing status and, if you're filing jointly, whether your spouse is covered by a retirement plan at work. Don't forget: There are annual limits to how much you can contribute to a workplace retirement plan and an IRA. But, unlike workplace retirement plans, you have until the tax filing deadline to make last-minute IRA contributions that could reduce your previous year's taxable income. Mark your calendars for this year: April 18, 2023.
There's also the Saver's Credit, a tax credit worth up to 50% of your contribution to a workplace retirement plan or IRA, up to a max of $2,000 if you're married filing jointly or $1,000 for all others. Some requirements: being 18 or older, not being a student, and not being claimed as someone else's dependent.
3. Health care savings deductions
Saving for qualified medical expenses in a health savings account (HSA) or a flexible spending account (FSA) could lower your gross taxable income too. If the account is through your employer benefits, you may make pre-tax contributions directly from your paycheck. If you open the account yourself because you have an HSA-eligible health plan, your contributions are tax-deductible even if you don't itemize. Just like with an IRA, HSAs have annual contribution limits and you're allowed to add to them up until Tax Day.
4. Higher education deductions and credits
Tuition costs and student loans might bring you down the rest of the year, but they could give you a leg up at tax time. Up to $2,500 of interest paid on qualifying student loans may be deducted from your gross taxable income whether or not you take the standard deduction, as long as you're within the income limits, you're not married filing separately, and neither you nor your spouse can be claimed as dependents.
You may also qualify for 2 education-related tax credits, though both have income limits. If you're in your first 4 years of higher ed, attending at least half-time, and pursuing a degree or other qualified credential, the American Opportunity Tax Credit could shave up to $2,500 off your tax bill. The Lifetime Learning Credit allows you to claim up to $2,000 on qualified tuition and education-related expenses paid toward undergraduate, graduate, and professional degree courses during the tax year. But you can't take both of these credits for the same student or the same expenses in the same tax year.
If you're saving for higher education costs in a 529 college savings plan, those contributions are not federally tax-deductible. However, you may be able to deduct them from your state taxes, depending on your plan and where you live. Compare 529 plans by state
5. Energy efficiency credits
More green for being green. Thanks to the Inflation Reduction Act of 2022, you could claim 2 different tax credits for energy-efficient home improvements. The Energy Efficient Home Improvement Credit could give you up to $500 (or up to $1,200 in years following 2022) for energy-saving improvements, such as updates to heating, cooling, and water-heating equipment, or added insulation. If you installed an energy-producing system, such as solar panels, windmills, or geothermal heat pumps, you might be able to claim up to 30% of that investment back through the Residential Clean Energy Credit.
Did you make the leap to an electric vehicle in 2022? Depending on the type, cost, and manufacturer, you might be eligible for up to $7,500 off your tax bill through a clean vehicle tax credit.
6. Income and work credits
Naturally, your earnings play a big part in your tax bill size. But if you're under the income limits, you may be able to take the Earned Income Tax Credit. Intended for low to moderate earners, this credit could help you claim anywhere between a few hundred to a few thousand dollars, depending on whether you have kids and if you're filing alone or jointly with a spouse. Other sources of income, such as investment income, may impact your eligibility too.
Unless you own a business, your work expenses might not be tax-deductible. But there are some exceptions. If you're an educator who spends money on classroom supplies and other necessary expenses, you may be able to deduct up to $300 in 2022. Check if you're eligible—and keep those receipts.
7. Property and investment loss deductions
Tax season can help you balance what you've gained with what you've lost. If your home, car, or other belongings were damaged in a federally declared disaster, such as a hurricane or tornado, you may be able to deduct what insurance didn't cover. (You could be eligible for other financial help too.)
As for investing, you pay taxes on realized investment gains—any securities you've sold for a profit. But if you've also sold investments during the year at a loss, you may deduct those losses from your capital gains, lowering the amount you'll be taxed on. If you lost more than you gained in a year, you may deduct up to $3,000 ($1,500 if you're married filing separately) from your ordinary income too. Lost more? You could carry over the rest to deduct in future years. This strategy has a name: tax-loss harvesting.
If you itemize:
8. Charitable donation deductions
Monetary donations to qualified nonprofit organizations can be tax-deductible, depending on your income. The same goes for non-cash gifts. So that bag of clothes or purged toys both count. Other donations could include home goods, books, old cars, even stocks and bonds, but income limits might differ when you donate assets instead of cash.
Read the IRS guidelines carefully or consult a tax advisor before deducting donated items. The IRS might think they're worth less than you do. Deductible clothes and home goods, for example, must be in good used condition or better—and they require a qualified appraisal and Form 8283 if they're worth more than $500.2 Keep records of all donated items and their values.
9. Out-of-pocket medical and dental expense deductions
Uncovered or out-of-pocket medical expenses, especially surprise ones, can be painful. (Emergency fund, anyone?) Fortunately, if these add up to more than 7.5% of your adjusted gross income, you may be able to deduct them on your taxes. This is true for your spouse's and dependents' health care services too, including doctor or dentist fees, hospital care, prescriptions, and even addiction treatment. Check out this list of qualified expenses. If you have a disability, or your spouse or a dependent does, associated costs, such as accessibility home improvements or dedicated care, could also count.
10. Home, city, and state deductions
If you own your home (or a second home, lucky you) and have a mortgage, you may be able to deduct the interest you paid throughout the year, plus other charges such as prepayment fees or even some late payment fees. Whether your home is a house, condo, apartment, barndominium, or beyond, your purchase year and mortgage amount affect how much you can deduct.
Depending on where you live, you may be paying local or state taxes. If you itemize, you're allowed to deduct a combination of your property taxes and either your state income taxes or your state or local sales taxes, up to $10,000.
11. Gambling-loss deduction
You win some, you lose some, you pay some, you deduct some. Yes, you're on the hook for taxes on gambling winnings, but if the slots, cards, or lotteries weren't in your favor at other times, you can deduct losses up to the amount that you won from gambling. No wins? Unfortunately, you won't be able to deduct your losses, but at least you'll have no extra taxable income. You'll just need to be that person in the casino asking for receipts.