Tax Deductions and Credits Explained (2025-2026): What You Can Claim and How to Save

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When tax season rolls around, deductions and credits can make a real difference in how much you owe — or how much you get back. Deductions lower the portion of your income that’s taxed, while credits reduce your tax bill dollar for dollar. Most people stick with the standard deduction because it’s simple, but in some cases, itemizing can unlock bigger savings.

The key is knowing which breaks you actually qualify for — because the right mix of deductions and credits can add up to meaningful money back in your pocket.

Tax Deductions vs. Tax Credits — What’s the Difference?

Both tax deductions and tax credits can lower what you owe the IRS, but they work in very different ways. However, you don’t have to choose one or the other. Many taxpayers can claim both deductions and credits in the same year, depending on their situation.

• Tax deductions reduce how much of your income is taxed. The less taxable income you have, the less tax you’ll owe overall.
• Tax credits, on the other hand, cut your tax bill directly. They lower what you owe dollar for dollar, making them especially valuable.

This side-by-side breakdown shows how each one affects your taxes.

How Tax Deductions Work

Tax deductions lower the amount of your income that’s subject to taxes, which can reduce your overall tax bill. Some deductions are automatic, while others depend on your expenses, filing status, or financial situation.

The three types of deductions

Tax deductions fall into one of three categories.

• Above-the-line deductions. These reduce your gross income to arrive at your adjusted gross income (AGI), which can affect your eligibility for other tax breaks. Common examples include traditional IRA contributions, HSA contributions, and student loan interest.
• Standard deduction. A set dollar amount based on your filing status that most taxpayers can claim without tracking individual expenses.
• Itemized deductions. If your eligible expenses add up to more than the standard deduction, itemizing may lower your tax bill. You can’t itemize and take the standard deduction in the same year, and itemizing requires careful record-keeping and documentation.

Standard Deduction Amounts for 2025-2026

These standard deduction amounts show how much income you can shield from federal taxes before the IRS calculates what you owe. Amounts typically increase each year to adjust for inflation.

Additional standard deduction amounts

Taxpayers who are age 65 or older or legally blind qualify for a higher standard deduction.

Standard deduction for dependents

Should You Take the Standard Deduction or Itemize?

Now that you’ve seen the standard deduction amounts by filing status, use this quick yes-or-no checklist to see whether itemizing is likely worth it for you.

Do your total itemized deductions exceed the standard deduction for your filing status?

• Yes: Itemizing will usually save you more
• No or not sure: Keep going

Do you own a home?

• Yes: Itemizing may make sense if you can deduct mortgage interest, property taxes, or points
• No: Keep going

Do you have high medical expenses?

• Yes: Itemizing could help if qualified expenses exceed 7.5% of your adjusted gross income (AGI)
• No: Keep going

Do you make large charitable donations?

• Yes: Itemizing could lower your tax bill
• No: Keep going

Are you self-employed?

• Yes: You can take the standard deduction and still deduct eligible business expenses separately
• No: It’s worth running both options to compare

If you answered yes to several of these questions, calculating your itemized deductions is probably worth the effort. If most of your answers were no, the standard deduction is likely the smarter — and much simpler — choice.

Standard Deduction vs. Itemizing: Which Option Makes More Sense?

Both options can lower your tax bill, but they work in very different ways — and one is usually far easier than the other. This quick comparison shows how the standard deduction stacks up against itemizing, and which types of filers each approach tends to benefit most.

Common Tax Deductions You Might Qualify For

The following common tax deductions can lower your bill, so check to see if you qualify for any or all of them.

Income and retirement-related deductions

• Traditional IRA contributions. Contributions to a traditional IRA may be deductible, depending on your income, filing status, and whether you or your spouse are covered by a workplace retirement plan.
• Health savings account (HSA) contributions. Contributions to an HSA are deductible and reduce your adjusted gross income, as long as you’re enrolled in an eligible high-deductible health plan.
• Saver’s Credit. Some low- to moderate-income taxpayers may qualify for a credit for contributing to a retirement account. (See the tax credits section below for eligibility details.)
• Student loan interest. You may be able to deduct up to $2,500 in qualified student loan interest as an above-the-line deduction, even if you don’t itemize.

Housing-related deductions

• Mortgage interest. You can deduct interest on up to $750,000 in qualified home loans ($1 million if your mortgage was taken out before December 16, 2017).
• Property taxes (SALT deduction). State and local taxes — including property and income or sales taxes — are subject to a combined SALT cap, which limits how much you can deduct each year.
• Home office deduction. Self-employed taxpayers may be able to deduct a portion of housing costs if they use part of their home regularly and exclusively for business.
• Private mortgage insurance (PMI). PMI has not been deductible in recent years, but new legislation has reinstated the deduction for tax year 2026, allowing eligible homeowners to claim it again.

Health and medical deductions

• Medical and dental expenses. You can deduct qualified medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI), as long as you itemize.
• Self-employed health insurance premiums. If you’re self-employed, you may be able to deduct health insurance premiums for yourself, your spouse, and your dependents, even if you take the standard deduction.

Charitable contributions

• Cash charitable donations. Cash gifts are the simplest to deduct and generally require basic documentation, such as bank records or written acknowledgments from the charity.
• Non-cash charitable donations. Donations of property — especially appreciated assets like stocks — come with more complex valuation and reporting rules, but they can offer larger deductions and help you avoid paying capital gains tax on the donated asset.ins tax advantages.

Work- and education-related deductions

Eligible taxpayers may also be able to deduct the following expenses, depending on their situation:

• Qualified educator expenses. Eligible teachers and educators can deduct certain out-of-pocket classroom expenses they pay for themselves.
• Job-related education expenses. Some education costs may be deductible if they maintain or improve skills required for your current job (but not if they qualify you for a new profession).
• Business expenses for self-employed workers. Self-employed taxpayers can deduct ordinary and necessary expenses related to running their business.
• Mileage expenses. Business mileage can be deducted using either the standard mileage rate (the simpler option) or the actual expenses method, which requires more detailed record-keeping.

Lesser-Known and Often Overlooked Deductions

Some of the most valuable tax breaks don’t get much attention — and that’s exactly why they’re easy to miss. If you qualify for any of the deductions below, overlooking them could mean leaving real money on the table.

• Gambling losses. You can deduct gambling losses, but only up to the amount of gambling winnings you report for the same tax year — and only if you itemize.
• Casualty and theft losses. Losses tied to income-producing property may be deductible. Personal property losses generally qualify only if they occurred in a federally declared disaster area and meet IRS requirements.
• Investment-related expenses. Certain costs tied to investing, such as margin interest, may be deductible under specific circumstances.
• Early withdrawal penalties. Penalties paid for withdrawing funds early from a CD or similar account can be deductible, even if you don’t itemize.
• Moving expenses for military members. Qualifying active-duty military personnel may be able to deduct certain moving expenses related to a permanent change of station.

Income Limits and Deduction Caps to Keep in Mind

Not every tax break is unlimited. Many deductions are subject to caps, income phaseouts, or other restrictions that can reduce — or eliminate — their value as your income rises. These limits are designed to focus benefits on lower- and middle-income filers, but they can catch people off guard if they’re not accounted for before filing.

Before submitting your return, it’s worth checking how the following limits may apply to you. Just keep in mind that tax rules change frequently, so guidance from prior years doesn’t always carry forward.

• State and local tax (SALT) deduction cap. The SALT deduction limits how much you can deduct for combined state and local income, sales, and property taxes.
• Medical expense threshold. Only the portion of qualified medical and dental expenses that exceeds 7.5% of your adjusted gross income (AGI) is deductible, and only if you itemize.
• Income limits on traditional IRA deductions. The ability to deduct traditional IRA contributions phases out at higher income levels, with different thresholds depending on your filing status and whether you or your spouse are covered by a workplace retirement plan.

Tax Credits That Can Further Reduce What You Owe

Tax credits work differently from deductions. Instead of lowering your taxable income, they reduce your tax bill dollar for dollar. If you qualify, these credits can make a meaningful difference in what you owe — or increase your refund — when you file.

Credits for working families

• Earned Income Tax Credit (EITC). Available to low- and moderate-income workers, the EITC can reduce your tax bill or increase your refund based on your adjusted gross income (AGI), filing status, and number of qualifying dependents. Some filers without dependents may also qualify. For 2026 filers, the credit is worth up to $7,830, depending on eligibility.
• Child Tax Credit. Eligible taxpayers may be able to claim a credit of up to $2,200 for each qualifying child under age 17, subject to income limits.
• Child and Dependent Care Credit. This credit helps offset the cost of care for a qualifying child or dependent while you work or look for work. It’s worth up to $3,000 for one qualifying dependent or $6,000 for two or more.

Education credits

Taxpayers with qualified education expenses may be eligible for up to $2,500 in tax credits through one of the options below. You can’t claim both credits for the same expenses in the same year.

• American Opportunity Tax Credit (AOTC). Available for eligible undergraduate education expenses, typically during a student’s first four years of higher education.
• Lifetime Learning Credit (LLC). Available for a wider range of education expenses, including graduate programs and courses taken to improve job skills.

Retirement and savings credits

• Saver’s Credit. Officially called the Retirement Savings Contributions Credit, this credit may be available to eligible low- and moderate-income taxpayers who contribute to a qualified retirement account. The credit is worth up to $2,000, depending on your adjusted gross income (AGI), filing status, and contribution amount.

Real-World Examples: How Deductions and Credits Lower Your Taxes

These simplified examples show how deductions and credits can reduce taxes in different, very common situations. The numbers are hypothetical, but they reflect how the tax rules actually work.

Example 1: Single renter taking the standard deduction

Situation:

• Filing status: Single
• Income: $58,000 (W-2 wages)
• Housing: Renter

What they claim:

• Standard deduction of $15,750

How it helps:

• Taxable income drops to $42,250

Impact:

• Federal tax bill is reduced by about $2,000

Example 2: Married homeowners who itemize

Situation:

• Filing status: Married filing jointly
• Combined income: $130,000
• Homeowners with charitable giving

What they claim:

• Mortgage interest: $16,000
• Property taxes: $10,000
• Charitable donations: $8,000
• Total itemized deductions: $34,000

How it helps:

• Itemized deductions exceed the $31,500 standard deduction by $2,500
• Taxable income drops to $96,000

Impact:

• Saves about $600 more than taking the standard deduction

Example 3: Self-employed freelancer with business deductions

Situation:

• Filing status: Single
• Income: $92,000 (self-employed)
• Has a home office and HSA

What they claim:

• HSA contribution: $4,300
• Business expenses: $18,000
• Total deductions: $22,300

How it helps:

• Deductions exceed the standard deduction
• Taxable income drops to $54,950

Impact:

• Cuts both income taxes and self-employment taxes
• Total savings of roughly $9,000

Example 4: Student using deductions and credits

Situation:

• Filing status: Single
• Income: $32,000 (W-2 wages)
• Has student loan interest and education expenses

What they claim:

• Standard deduction of $15,750
• American Opportunity Tax Credit

How it helps:

• Taxable income drops to $14,250

Impact:

• No federal income tax owed
• Receives the refundable portion of the education credit as a refund

What These Examples Show

Deductions lower the income you’re taxed on, while credits reduce your tax bill directly — and in some cases, even generate a refund. The right mix depends on your income, expenses, and life situation, which is why running the numbers matters.

Common Tax Deduction Mistakes to Avoid

Even small misunderstandings can lead to missed savings, filing errors, or unwanted attention from the IRS. Before you file, double-check that none of these common tax deduction mistakes apply to you.

• Assuming everyone should itemize. For most filers, the standard deduction is still the better — and simpler — choice.
• Assuming everyone should take the standard deduction. In some situations, itemizing can lower your tax bill more, especially if you have large deductible expenses.
• Believing rent is deductible. Rent generally isn’t deductible on your federal return, unless it’s tied to a qualifying business use of your home.
• Confusing deductions with credits. Deductions lower taxable income, while credits reduce your tax bill dollar for dollar — mixing them up can lead to incorrect estimates.
• Claiming home office expenses as an employee. W-2 employees generally can’t deduct home office expenses under current tax law.
• Failing to document expenses. Missing receipts or incomplete records can lead to denied deductions if your return is reviewed.
• Claiming ineligible dependents. Dependents must meet specific IRS criteria — claiming someone who doesn’t qualify can delay refunds or trigger penalties.
• Claiming deductions or credits you don’t qualify for. Eligibility rules matter, and claiming ineligible tax breaks can result in corrections, penalties, or audits.

How To Lower Your Tax Bill the Smart Way

Most people benefit from the standard deduction, but not everyone — for a small percentage, itemizing is worth the hassle. Deductions are good because they reduce your taxable income, but credits often provide the biggest savings. The best strategy depends on your income, family and work situation. When in doubt, tax software or a professional can help you maximize savings and secure all available credits and deductions.

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