Maybe it’s OK to use “tax deduction” and “tax credit” interchangeably in casual conversation, providing you’re not talking to an IRS agent.
There’s an immense difference between these tax bill reducers, and if you haven’t already retained someone who knows the difference, now – now! – is the time to find one.
Deductions
We usually hear more about deductions but, to be honest, they tend to have less impact on your tax bill than credits. Still, there’s a process to tax avoidance, and deductions is where we start. (Important note: Tax avoidance refers to legal means to lower your taxes, as opposed to illegal tax evasion.)
Deductions are amounts you subtract from your total income to figure your adjusted gross income, and it’s your AGI that determines which tax bracket you’re in. The standard deduction for individuals and for joint filers is $14,600 and $29,200 respectively, for 2025. That’s the minimum you ought to deduct.
Let’s say you’re married and filing jointly and, between the two of you, you made $400,000 in income between your day jobs and your side ventures. By taking the $29,200 standard deduction, you lower your AGI to $370,800. This drops you from the 35% marginal tax bracket to the 32%, and you didn’t even have to document anything.
But you don’t have to accept the standard deduction. If you’ve saved your receipts and don’t mind filling out a Schedule A form, you might find that you have far more legitimate items to deduct than the standard.
Here are some of the more frequently filed deductions:
• Bad debts
• Capital losses
• Charitable donations
• Gambling losses
• Home mortgage interest
• State and local taxes
• Losses from disaster or theft
• Medical expenses exceeding 7.5% of AGI
And, you might qualify to take these deductions in addition to the standard deductions:
• Business use of home and car
• Contributions to a health savings account or traditional IRA
• Penalties on early withdrawals
• Student loan interest
• Alimony payments, providing the marriage ended before 2019
Neither of these lists is exhaustive. Some people make a good living knowing how to leverage every possible deduction.
Credits
Credits are a little more complicated, but far more advantageous in most cases. That’s because they’re basically cash. Once you figure out how much you owe given your AGI, then credits provide you dollar-for-dollar offsets to your tax bill.
There are two kinds of credits: non-refundable and refundable. The difference is that non-refundable credits lower the amount of taxes you owe while refundable credits can actually exceed your tax bill. If that happens, you might end up paying $0 in taxes – then still get money back.
Here are some of the most commonly filed non-refundable credits:
• Taxes paid to a foreign tax authority
• Child and dependent care
• Elderly dependent care
• Lifetime learning
• Retirement savings
• Residential clean energy
• Adoption
And here are the refundable ones:
• Child Tax Credit
• Earned Income Tax Credit
Partially refundable credits include the American Opportunity Credit, which defrays educational expenses.
At the close
Not everyone will qualify for all of these. The refundable credits in particular tend to have AGI limits attached.
While it’s good to talk about tax strategy now, as your W2s and 1099s start rolling in over the next weeks and months, and that April 15 deadline starts to loom, this is something you should have at the back of your mind throughout the year.
So, as you figure out your taxes from last year, keep a thought about your taxes for this year. Smith Anglin financial advisors and tax experts can help you focus on how you can minimize your next tax bill – and what you can still do to minimize the current one.