Quick refresher- tax deduction vs. tax credit

A tax deduction reduces the amount of income subject to tax, so its value depends on your marginal tax rate. For example, if you’re in the 24% federal tax bracket, a $1,000 deduction would reduce your tax by $240.

A tax credit reduces your tax liability dollar for dollar, meaning a $1,000 credit lowers your tax bill by $1,000, making it more valuable than a deduction of the same amount regardless of your tax bracket.

Credits for individuals include:

• Adoption Credit – This credit helps offset qualified adoption expenses, subject to income phaseouts.  New for 2025, up to $5,000 of the credit is refundable.
• American Opportunity Tax Credit – The AOTC provides a partially refundable credit of up to $2,500 for certain qualifying expenses paid in pursuit of a degree during the first four years of higher education. The credit applies to 100% of the expenses up to $2,000 and then 25% of the next $2,000 of expenses.
• Child and Dependent Care Credit – You can claim 20–35% of qualifying child and dependent care expenses, depending on your income, for children under 13 or any other dependent who cannot care for themselves. The maximum expenses used to calculate the credit are $3,000 for one qualifying person or $6,000 for two or more.
• Child Tax Credit – If you have children under age 17 at the end of the calendar year, you may be eligible for a Child Tax Credit of up to $2,200 per qualifying child on your tax return. The credit is partially refundable and phases out at higher income levels. Personal and dependent exemption deductions are no longer available, so the Child Tax Credit is now the primary federal tax benefit for families with qualifying children.
• Electric Vehicle Tax Credit (limited) – You may qualify for a tax credit on your tax return if you purchased an electric vehicle (EV) placed in service by Sept. 30, 2025. The credit can be up to $7,500 but is subject to an income based phase-out.
• Energy Efficient Home Improvement Credit – Homeowners can claim a tax credit equal to 30% of qualifying costs, with annual limits of up to $2,000 for qualified heat pumps, water heaters, or biomass stoves / boilers and up to $1,200 for other energy-efficient improvements for a total of up to $3,200. These credits expired as of December 31, 2025.  New homes are not eligible.
• The Lifetime Learning Credit (LLC) is a nonrefundable credit of up to $2,000 for qualifying educational expenses subject to income phase-outs.  Qualifying expenses include courses at an eligible educational institution to obtain a degree, credential or to improve one’s job skills. In addition, there is no limit on the number of years it can be claimed. The credit is 20% of the expenses paid up to $10,000. 

Above the line and itemized deductions for individuals include:

• 401(k) Contributions – Pre‑tax contributions to a traditional 401(k) plan reduce taxable income, lowering current‑year federal tax liability. For 2025, the elective deferral limit is $23,500 (plus a $7,500 catch‑up if age 50+ and $11,250 between ages 60-63).
• Charitable Contribution Deduction –Deduction for qualifying charitable gifts if itemizing. For 2025, cash gifts to public charities may be deductible up to 60% of AGI (varies by gift type). Note: limits can vary by donation type and charity category.
• Educator Expense Deduction – Eligible educators can deduct up to $300 ($600 if both spouses are eligible educators filing jointly) in unreimbursed classroom supplies and related out‑of‑pocket expenses.
• Gambling Loss Deduction – Losses from gambling are deductible if you itemize, up to the amount of your reported gambling winnings, with proper records.
• Health Savings Account (HSA) Deduction – Contributions to an HSA are deductible; qualified medical withdrawals are tax‑free. For 2025, the limit is $4,300 for individuals and $8,550 for families, with a $1,000 catch‑up for age 55+.
• IRA Contribution Deduction – There is a deduction for traditional IRA contributions, subject to income/coverage limits. For 2025, the maximum IRA contribution is $7,000 plus a $1,000 catch‑up contribution for taxpayers age 50+.  Contributions for 2025 can be made until April 15, 2026.
• Medical Expenses Deduction – This deduction is for unreimbursed medical expenses above 7.5% of AGI.
• Mortgage Interest Deduction – The home mortgage interest deduction lets taxpayers who itemize deduct interest paid on up to $750,000 of qualified mortgage debt ($375,000 if married filing separately) on a primary or secondary residence.  There are higher limits on indebtedness incurred prior to December 16, 2017.
• Car Loan Interest Deduction (new) – There is a deduction for up to $10,000 of interest paid on new, personal-use car loans originated after December 31, 2024 that meet certain criteria, including U.S. final assembly.  This is an “above the line” deduction with income limitations.
• Tip Income Deduction (new) – Employees and eligible self‑employed individuals in traditionally tipped occupations can deduct up to $25,000 of qualified tips received during the year (phases out at higher incomes). This new above‑the‑line deduction is available 2025–2028.
• Overtime Pay Deduction (new) – You may deduct the qualified portion of overtime compensation (the part earned above your regular rate) up to $12,500 for single filers or $25,000 for married filing jointly. This new deduction (effective 2025–2028) phases out for taxpayers with modified AGI over $150,000 ($300,000 for joint filers).
• Senior Bonus Deduction (new) – Taxpayers age 65 or older may claim an additional $6,000 deduction (per individual, or up to $12,000 for married couples filing jointly) in addition to the standard or itemized deduction. Phases out at higher income levels.
• State and Local Tax (SALT) Deduction – The SALT deduction allows taxpayers who itemize to deduct up to $40,000 ($20,000 if married filing separately) of state and local income, sales, and property taxes paid each year.  This deduction scales back to $10,000 ($5,000 if married filing separately) at higher income levels.
• Student Loan Interest Deduction – In 2025, taxpayers can deduct up to $2,500 of interest paid on qualified student loans as an above-the-line deduction.  The deduction phases out for single filers with modified adjusted gross income (MAGI) between about $85,000 and $100,000 (and for joint filers between about $170,000 and $200,000), with no deduction allowed above those upper limits.

Proactive tax planning helps ensure you’re capturing available credits, taking advantage of new deductions, and avoiding missed opportunities that could increase your tax liability. Work with your tax advisor to identify planning strategies tied to education costs, family changes, retirement contributions, and major life events.