Tax season has come and gone, but that doesn’t mean you shouldn’t stop preparing for taxes in 2024. Knowing the credits and deductions you may qualify for can help you save more come tax time and could help you get a larger tax refund.
So, what are tax deductions and credits? What are the differences between them? In short, tax deductions reduce your tax liability on your taxable income. Unlike some credits, deductions cannot be refunded towards a larger tax return. Tax credits, on the other hand, are dollar-for-dollar reductions on your tax liability, and many are refundable.
In this guide, you can learn about five tax deductions and credits that every American should know for the 2024 tax season.
Child Tax Credit, Adoption Credit, and Child and Dependent Care Tax Credit
Families with dependent children may qualify for one or more child-related tax credits in 2024. One of the most notable credits, the Child Tax Credit, provides up to $1,900 for each qualifying child.
Unfortunately, the amount is down from the $3,600 it was during the 2021 tax year as part of the American Rescue Plan during the COVID-19 pandemic. It’s also worth knowing that the Child Tax Credit is a refundable credit.
Did you adopt a child during the 2023 tax year? If so, you could qualify for up to a $15,950 deduction toward the cost of your adoption fees. The amount you can receive is determined by the cost of the adoption and your adjusted gross income (AGI). Additionally, you can receive the full credit amount if the child you adopt has functional needs. However, you cannot claim the deduction for adopting the child of your spouse.
Finally, the Child and Dependent Care Credit covers a percentage of the cost of care for children under 13 years of age, or a child, spouse, or parent who are unable to care for themselves. To qualify for this credit, the child or dependent care must be necessary for you to work. You can claim expenses up to $3,000 for one child or dependent or up to $6,000 for two or more.
Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) is designed to aid low-income and moderate-income individuals and families. The amount you can receive is based on many factors, including your income, the number of dependents you have, and your filing status. Additionally, this amount can vary from one tax year to the next. For example, qualifying 2024 filers can receive a credit between $600 and $7,430.
To claim the Earned Income Tax Credit, you must meet the following criteria:
- Be a U.S. citizen or resident alien for the entire year
- Do not file Form 2555
- Hold a valid Social Security number
- Have an annual income that meets the limits
Tax Credits and Deductions for Education
There are three notable education-based tax credits and deductions:
- American Opportunity Tax Credit
- Lifetime Learning Credit
- Student Interest Deduction
The American Opportunity Tax Credit helps Americans afford further education debt by providing a credit toward certain school-related expenses. Generally, you can claim the first $2,000 you spend on school fees, tuition, equipment, and books as a dollar-for-dollar ratio. However, it’s worth noting that you cannot deduct fees related to transportation or housing. After the first $2,000, you can deduct an additional 25% of the next $2,000 you spend on expenses.
The Lifetime Learning Credit is similar to the American Opportunity Tax Credit. However, you can claim 20% of the first $10,000 you’ve paid for school fees and tuition. This credit is capped at $2,000, and housing and transportation related expenses are ineligible.
Finally, the Student Interest Deduction allows you to deduct up to $2,500 on your tax return toward the interest you paid on your existing student loans throughout the tax year.
Retirement Savings Deductions
Did you save money toward retirement during the 2023 tax year? If so, you may be able to claim retirement-related tax deductions or credits.
One of the most common retirement savings deductions is the 401(k) Contributions Deduction. Both employees and self-employed workers can qualify for this retirement savings deduction.
This deduction reduces your taxable income up to a specified amount for the income you put toward a 401(k) during the tax year. The maximum deduction you can take may vary from year to year. For example, you could deduct up to $23,000 during for the 2024 tax year.
If you have an IRA, you may be able to deduct your contributions. However, the amount you are able to deduct depends on whether you or your spouse has an IRA retirement plan through employment as well as your annual income.
Lastly, the Saver’s Credit is available to persons contributing to an IRA or other eligible retirement plans. Depending on your filing status and income, your credit can be between 10 to 50% of the amount you’ve contributed. There is a maximum credit amount of $2,000, or $4,000 if you are married filing jointly.
Medical Expenses Deductions
Medical expenses aren’t uncommon in America, but did you know you can deduct some of those expenses on your tax return? You can deduct qualifying, unreimbursed medical and dental expenses beyond 7.5% of your adjusted gross income.
Qualifying medical expenses include:
- Payments you made to psychologists, psychiatrists, dentists, chiropractors, surgeons, doctors, and other practitioners
- Expenses related to nursing home and hospital care
- Fees for addiction programs, including those to help you quit smoking
- Prescription drugs and insulin
- Weight loss programs to treat a disease diagnosed by your doctor, including obesity
- Certain medical equipment, such as crutches and wheelchairs
- Prescription eyeglasses or contacts, hearing aids, dentures, and service animals
- Transportation costs for medical care
- Insurance premiums that you pay out of pocket for and are not paid for by your employer
However, it is worth knowing that you cannot take a standard deduction if you intend to take medical expense deductions. Therefore, you may want to compare the amounts you would receive with an itemized tax return over the standard deduction amount to see which option is right for you.
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