Tax Deductions Guide: 20 Popular Breaks

Tax Deductions

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Tax benefits come in two major categories: tax deductions and tax credits. Let’s explore how these can save you money on your taxes.

First off, tax credits directly reduce the amount of tax you owe, giving you a dollar-for-dollar reduction. On the other hand, tax deductions, often known as “tax write-offs,” allow you to deduct a specific amount from your taxable income, resulting in a smaller benefit.

Keep in mind that tax deductions are most effective when you itemize your deductions. This usually makes sense for individuals with significant deductible expenses.

In this guide, we’ll delve into 20 popular tax breaks and explain how tax deductions function. Whether you’re a seasoned taxpayer or new to the process, our content will help you make the most of your tax savings in 2023. Let’s get started!

What Is A Tax Deduction?

A tax deduction is the amount of money you can deduct from your income before you pay taxes. It’s basically a way for you to subtract some of your expenses from your gross income so that you can reduce your taxable income and pay less in taxes on it.

Deductions are usually only available if you itemize deductions on Schedule A (Form 1040). If you don’t itemize, then any expenses that are not specifically excluded aren’t deductible.

What’s an income tax credit?

A tax credit reduces your tax bill by the same amount as the credit. Some credits are refundable, which means that if you owe $250 in taxes but qualify for a $1,000 credit, you’ll get a check for the difference of $750. It could also be a credit for taxes already paid or a “discount” given by the state in certain situations. 

How to take tax deductions?

In general, there are two ways to claim tax deductions: take the standard deduction or itemize deductions. Both are impossible.

The standard deduction for taxes in 2022 and 2023

The standard deduction reduces your adjusted gross income by a flat dollar, no questions asked (AGI). How you file for taxes affects how much you can get.

Itemize Deductions

If you itemize, you can take any of the hundreds of tax deductions you are eligible for to lower your taxable income. The less tax you have to pay, the more you can deduct.

Should you take a standard deduction or a deduction for each item?

Here is what it comes down to:

  • You should probably itemize and save money if your total itemized deductions are more than your standard deduction. Be aware, though, that itemizing your deductions usually takes more time, requires more forms, and you’ll need proof that you deserve the deductions.
  • If the total of your itemized deductions is less than your standard deduction, it may be better to take the standard deduction (and the process is faster).
Note: The standard deduction has gone up a lot in recent years, so even if you’ve always itemized in the past, you might find that it’s the best choice for you now. Your tax software or a tax professional can run your return both ways to see which results in a lower tax bill. 

20 of the most popular tax breaks and tax credits

There are a lot of credits and deductions out there. Here is a drop-down list of some common ones, as well as links to our other content that will help you learn more.

Children’s tax credit

A child tax credit is a tax credit that some countries give to parents with children who depend on them. The credit is often based on how many children a taxpayer has who depend on them and sometimes on how much money the taxpayer makes. This could get you up to $2,000 per child for the 2022 tax year, with $1,500 of the credit potentially being refundable.

Tax credits for child and dependent care

It’s meant to help pay for some of the costs of daycare for a child under 13, a spouse or parent who can’t take care of themselves or another person who depends on you and needs care so you can work. In general, it’s up to 35% of costs up to $3,000 for one dependent or $6,000 for two or more.

Credit for American Opportunity Taxes

The American Opportunity Tax Credit is an income tax credit that helps pay for the first four years of college after high school. This lets you claim the first $2,000 you spent on tuition, books, equipment, and school fees (but not on living expenses or transportation), plus 25% of the next $2,000, for a total of $2,500. 

Credit for learning for life

The lifetime learning credit (LLC) is for qualified tuition and related costs paid for eligible students enrolled in an eligible educational institution. You can get back up to $2,000 of the first $10,000 you spent on tuition and fees. Like the American Opportunity Tax Credit, the Lifetime Learning Credit doesn’t count living expenses or transportation as eligible costs. You can get free books or supplies you need for school. 

Interest on student loans can be deducted

The student loan interest deduction is a tax break for college students and their parents who took out loans to pay for school.

It lets you subtract up to $2,500 from your taxable income if you spend interest on a loan. 

Credit for adopting

Adoptive parents can get a tax credit for adopting a child in the United States. This is done to encourage more people to adopt. Section 36C of the United States Internal Revenue Code gives credit to taxpayers who pay or spend money on “qualified adoption expenses.” 

This item covers up to $14,890 per child in adoption costs for the 2022 tax year. The credit starts to go down slowly at certain income levels, and it goes away completely when your modified adjusted gross income is $263,410 or more.

The earned income tax credit

The Earned Income Tax Credit (EITC) is a refundable tax credit that helps some low-income U.S. taxpayers by lowering the amount of tax they must pay by the same amount.

Taxpayers may be able to get money back if their tax credit is more than what they owe in taxes for the year. Depending on how many kids you have, if you’re married, and how much money you make, this credit can give you anywhere from $560 to $6,935 for the 2022 tax year. If your AGI is less than $59,000, you might want to look into it.

Charitable donations deduction

If you itemize, you might be able to take the value of your cash or property donations to charity, like clothes or a car, off your taxable income. According to the IRS, you can usually deduct up to 60% of your adjusted gross income.

Medical expenses deduction

In general, you can deduct qualified medical expenses that are not covered by insurance and that are more than 7.5% of your adjusted gross income for the year.

State and local taxes can be taken off

In section 170(a) of the Internal Revenue Code, “state and local taxes” are defined as taxes paid to states and localities on the forms. This is for the US Federal Income Tax. Especially for people who live in states with high state or property taxes.

For example, let’s say that for the current tax year, you paid $7,000 in property taxes and $9,000 in state income taxes. So, you couldn’t take $16,000 off your federal income taxes in that case. To keep your SALT deduction under $10,000, you’d have to choose the right mix of the two, like $7,000 in property taxes and $3,000 in state income taxes. 

Mortgage interest deduction

The mortgage interest tax deduction is said to make it more affordable to own a home. It lowers the federal income tax some homeowners have to pay by taking the mortgage interest they pay out of their taxable income.

The deduction changed after the Tax Cuts and Jobs Act (TCJA) was passed in 2017. For new loans, it lowered the mortgage debt on which interest can be deducted from $1 million to $750,000. This means homeowners can deduct interest paid on up to $750,000 of mortgage debt. But it also nearly doubled the standard deductions, meaning many taxpayers no longer need to itemize. 

Taking a loss from gambling

Losses and costs from gambling can only be deducted from the number of gambling winnings. So, if you spend $100 on lottery tickets, you can’t deduct it unless you win at least $100 and report it. You can only take away as much as you win. 

IRA (Individual Retirement Account) contributions deduction

You might be able to deduct contributions to a traditional IRA, but how much you can deduct depends on how much you make and whether or not you or your spouse has a retirement plan at work. For example, If you have a traditional IRA instead of a Roth IRA, you can contribute up to $6,000 in 2022 and $6,500 in 2023 and deduct it from your taxes. If you are 50 or older, you can add another $1,000 for 2022 and 2023. 

401(k) contributions deduction

When you put money directly from your paycheck into a 401(k), the IRS doesn’t tax it (k). In 2022, the maximum amount you can put in is $20,500, or $27,000 if you are 50 or older. Employers usually pay for these retirement accounts, but people who work for themselves can open their own 401(k)s. In 2022, the most you can put into a 401(k) is $20,500 or $27,000 if you are 50 or older. In 2023, the most you can put in is $22,500. On top of that limit, employers can also give money. The IRS sets these limits, which may change from year to year. 

Credit for savers

This credit ranges from 10% to 50% of contributions to an IRA,(Individual Retirement Account) 401(k), 403(b), or certain other retirement plans up to $2,000 ($4,000 if filing jointly). The percentage depends on your income and how you file your taxes.  It works: The credit is worth 50%, 20%, or 10% of a maximum contribution of $2,000 (or a total of $4,000 if you’re married and filing jointly). Let’s say you file as a single person and earn $19,000. You put $1,000 into an eligible account. Your saver’s credit would be worth $500. Due to the cap, if you put $5,000 into an eligible account, your credit would only be worth $1,000. 

Contributions to a health savings account

HSA (Health Savings Account) contributions are tax-deductible, and so are withdrawals, as long as they are used for qualified medical expenses.

For the 2022 tax year, if you have high-deductible health insurance for yourself only, the most you can put toward it is $3,650. If you have high-deductible coverage for your family, the most you can put in is $7,300. (People who are 55 or older can add an extra $1,000.) 

Self-employment expenses deduction

Freelancers, contractors, and other people who work for themselves can get a lot of good tax breaks. It’s one of the most common tax breaks for people who work for themselves.

The tax rate for self-employed people is 15.3% of their net income. On net earnings, the 12.4% Social Security tax and the 2.9% Medicare tax add up to that rate. Income tax is not the same as self-employment tax.  You can figure out: On your income taxes, you can deduct half of your self-employment tax.

What happens:

So, if your Schedule SE says you owe $2,000 in self-employment tax for the year, you’ll have to pay that money when it’s due, but at tax time, you can deduct $1,000 from your Form 1040.

Home office Deduction

If you use a regular and exclusive part of your home for business, the IRS lets you write off rent, utilities, real estate taxes, repairs, maintenance, and other costs related to that part of your home.

Educator expenses deduction

For the 2022 tax year, if you are a teacher or another qualified educator, you can deduct up to $300 that you spent on classroom supplies. 

Residential energy credit

This one can save up to 30% of the cost of installing solar energy systems like solar panels and water heaters. Solar panels might be a good idea for your home if you have a high utility bill, live in a good area, and could save money through tax breaks or other ways. Solar installation seems like a no-brainer for many homeowners because the cost of electricity from traditional sources is going up, and the government is giving people money to go green. But the actual cost of solar panels and whether or not they will save you money depends on a few key factors. 

Bonus: Electric vehicle tax credit

For the tax year 2022, this nonrefundable tax credit ranges from $2,500 to $7,500 and depends on the weight of the vehicle, the manufacturer, and whether or not you own the car.

For the tax year 2023, which will be filed in 2024, the credit is greatly increased and now includes used vehicles. 


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