As a general rule, deductions reduce your taxable income and tax credits reduce your tax bill. Tax credits are a dollar-for-dollar reduction of your tax liability, while some deductions require you to reach a certain threshold before you can deduct.

Taxpayers can choose to take either the standard deduction or itemized deduction, depending on which will give them the biggest tax advantage. If the taxpayer has a lot of medical care, property tax, mortgage interest, state and local taxes, or charitable donations, he or she is better off itemizing especially if the expenditures exceed the standard deduction.

Some deductions that are often overlooked are:

  • Car mileage used for business, medical, or charitable purposes
  • Alimony payments
  • Classroom expenses
  • Moving expenses when relocating for a new job
  • Self-employment tax
  • Self-employment health insurance
  • Job search expenses

The following tax credits may help to reduce your tax bill:

  • Earned Income Tax Credit for working, low-income people
  • Education Tax Credits for educational expenses
  • Child and Dependent Care Credit for childcare expenses or care for a disabled person who is unable to care for himself or herself
  • Child Tax Credits for each qualifying child in the household
  • Energy Tax Credit for homeowners
  • Hybrid Car Tax Credit

 

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