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Make a tax credit or deduction real Save you tax bills or give you a bigger refund? What about tax exemptions and exclusions? It is important to know what is most beneficial to claim in a tax return, but tax laws and jargon are not easy.
As an IRS registered agent, I'm here to break down what this means for your tax season so you can confidently know what really adds to refunds or lower tax bills. Here is how these common taxes are in the breakdown of how your taxes are and how to keep more hard-earned money.
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Read more: Tax sheet for 2025 Tax Season: Make your taxes simple with this tool
What is the difference between tax credits and deductions?
These two taxes are probably the most frequently confused taxes for my clients. Treat the tax credit as a gift card applied to your tax bill at checkout and use the tax deduction as a discount on your taxable income. Both are valuable, but points tend to be more influential.
Let's look at an example to help explain.
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Suppose you are a single filer who made $50,000 in 2024 without any deductions or points. Your taxable income is $50,000, so you will owe $6,059 in taxes.
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A $5,000 deduction will reduce your taxable income to $45,000, so you owe $5,171 in taxes.
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If you don't have a deduction but are eligible for a $5,000 tax credit, your taxable income will be $50,000. But you'll subtract $5,000 from your $6,059 tax bill, so you'll only owe $1,059 tax.
I have a lot of clients who are confused about both, especially the deduction of mortgage interest. Assuming the deduction would reduce tax dollars in taxes, some customers bought the home. But, in reality, you should calculate how much you can save by multiplying the deduction by your valid tax rate.
For example, if you pay $20,000 in mortgage interest during the year and the effective tax rate is 25%, this deduction will save you about $5,000 (20,000 x 0.25) in taxes. If it is a tax credit, you will save $20,000.
Tax Credit
Many tax credits are intentional to help specific groups or inspire certain types of behavior. Refundable credits may be more valuable as they reduce your taxes to below zero.
It is important to note that even if you are not eligible for a refundable tax credit, your tax liability is reduced to $0, the IRS will refund any money you pay in the year. Some common tax credits include tax credits for child care, education, retirement savings donations, and home renovations.
Read more: Can I ask for a credit for dependent care? Value in 2025
Tax reductions
The vast majority of tax deductions require you to deduct item by item to take them.
With the passage of the Tax Cuts and Jobs Act in 2017, the standard deductions increased significantly, so about 90% of U.S. taxpayers benefited more from taking them. The best tax software will guide you step by step through each possible deduction and then tell you whether standard deductions or itemized to save you the most money.
If you deduct item by item, some of the most common are mortgage interest, charitable contributions, and deductions for medical expenses. What we call “above the line” are some deductions that you can take even if you don’t list them item by item. Some common deductions include:
- Student Loan Interest Deduction: Up to $2,500 in student loan interest can be deducted.
- Teacher Fees: Educators can claim up to $300 out-of-pocket fees on classroom items such as books, supplies, and equipment.
- Retirement donations: Under certain conditions, contributions to traditional IRA and HSA are deductible.
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What is the difference between tax exemption and tax exclusion?
Waivers and exclusions may also sound similar, but they are very different.
Exemption
An exemption is a specific dollar amount that can reduce your taxable income. Before passing the tax reform program in 2017, you can ask for exemptions for yourself and each family member. However, under the current tax laws, these exemptions are set to $0 and are not used for federal tax returns.
exclude
Under the Internal Tax Act, all income is considered taxable, but Congress may pass laws that do not include certain types of income.
One common exclusion is the health insurance premiums your employer pays. While these are part of your compensation plan, they are excluded from your income. Many types of academic scholarships are also excluded from income, and most life insurance benefits and legal gifts you get from others are also excluded from income.
How can taxpayers increase refunds or lower tax bills?
With just a little planning, you can maximize tax breaks and refunds. Please follow the simple steps below to prepare.
- Keep a good record. Save paper receipts or use your mobile phone to take photos and sort them. These will be used for business expenses, charitable contributions, medical expenses, other taxes you pay, and any other taxes that may be deducted.
- Familiar with the tax credits and deductions available for your personal situation. If you have children, are low to middle income or own a family or business, then self-education is directly applicable to your basic requirements for tax breaks.
- Please note changes in tax laws. Congress has been passing bills, some of which affect taxes in small ways, while others affect taxes in large ways. Check CNET for latest news on taxes and how to save taxes.
Tax laws can be complex, but the goal is simple: don't pay more taxes than legally necessary.
