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Make tax credits or deductions Really Do you save money on your tax bill or make a more reimbursement? What about tax exemptions and exclusions? It is important to know what is most advantageous to claim on your income tax return, but the tax code and the jargon do not facilitate this.
As an agent registered with the IRS, I am here to break down what all this means for you this tax season so that you can know with confidence which really increases your reimbursement or reduces your tax bill. Here is a distribution of how these common tax terms work concerning your taxes and how to further keep your money harder.
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This story is part of 2025 taxesCNET coverage of the best tax software, tax advice and everything you need to produce your declaration and follow your refund.
Find out more: Tax season cheat sheet 2025: make your taxes simple with this tool
What is the difference between tax credits and deductions?
These two tax conditions are probably those that my clients most often confuse. Think of a tax credit as a gift card applied to your tax bill to the fund and a tax deduction as a discount on your taxable income. Both are precious, but credits tend to have much more impact.
Let’s see an example to help explain.
Let’s say that you are only one declarant who won $ 50,000 in 2024 without any deduction or credits. Your taxable income would be $ 50,000, so you need $ 6,059 in taxes.
A deduction of $ 5,000 would reduce your taxable income to $ 45,000, so you owe $ 5,171 in taxes.
If you did not have deductions but you qualified for a tax credit of $ 5,000, your taxable income would be $ 50,000. But you would subtract the $ 5,000 credit from your $ 6,059 tax bill, so you should only $ 1,059 in taxes.
I had many customers confusing both, in particular the deduction of mortgage interests. Some customers bought a house, assuming that the deduction would reduce their dollar taxes for a dollar. In reality, however, you must calculate the amount of a deduction will allow you to save by multiplying the deduction by your effective tax rate.
For example, if you pay $ 20,000 in mortgage interest during the year and have an effective tax rate of 25%, this deduction will save you about $ 5,000 (20,000 x 0.25) on taxes. If it was a tax credit, you would save $ 20,000.
Tax credits
Many tax credits are intentionally intended to help specific groups of people or to encourage certain types of behavior. Refundable credits can be even more precious because they reduce your tax amount to less zero.
It is important to note here that even if you are not eligible for reimbursable tax credits, but that your tax obligation is reduced to $ 0, the IRS will always reimburse all the money you paid during the year. Certain common tax credits include those for child care, education, contributions to retirement savings and home improvements.
Find out more: Can I claim the dependent care credit? What is worth in 2025
Tax deductions
The vast majority of tax deductions require you to detach your deductions to take them.
With the passage of Tax on tax reductions and jobs In 2017, the standard deduction was considerably increased so that around 90% of American taxpayers benefit more by taking it. The best tax software will guide you step by step thanks to each possible deduction, then tell you if the standard deduction or detail will save you the most money.
If you make deductions, some of the most common are those of the deduction of mortgage interests, charity contributions and medical costs. Some deductions are what we call the deductions “above the line”, which can be taken even if you do not detail. Some current deductions include:
- Deduction of student loans interests: Up to $ 2,500 in student loan interest can be deducted.
- Teachers’ expenses: Educators can claim up to $ 300 in excessive expenses on class articles such as books, supplies and equipment.
- Retirement contributions: Contributions to traditional IRAs and HSA are deductible under certain conditions.
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What is the difference between tax exemptions and exclusions?
Exemptions and exclusions may also seem similar, but they are very different.
Exemptions
Exemptions are a specific amount that can reduce your taxable income. Before the tax reform package was adopted in 2017, you could claim exemptions for yourself and each of your dependents. Under the current tax law, these exemption amounts are set at $ 0 and are not used in your federal income declaration.
Exclusions
Under the Internal Internal Code, all income is considered taxable, but Congress can adopt laws to the exclusion of certain types of income.
Common exclusion is health insurance premiums paid by your employer. Although these are part of your remuneration package, they are excluded from your income. Many types of university scholarships are also excluded from income, as are most life insurance profits and legitimate gifts that you receive from others.
How can income declarants increase their reimbursement or reduce their tax bill?
With just a little planning, you can maximize your tax reductions and refund. Follow these simple steps to prepare.
- Keep good records. Save the paper receipts or use your phone to take a photo and catalog them. It will be for commercial expenses, charitable donations, medical invoices, other taxes you pay and everything could be potential deductions.
- Familiarize yourself with tax credits and deductions available for your personal situation. If you have children, whether you are less than an average income or has a house or a business, it is worth educating yourself on the basic requirements of tax alternatives that apply directly to you.
- Be aware of changes in tax law. Congress adopts bills all the time, some of which affect taxes in small ways and others in a large way. Check CNET for the latest news on taxes and how to save money on your taxes.
The tax code can be complex, but the objective is simple: do not pay more tax than you need to legally.
