Comprehensive coverage of standard and itemized deductions plus valuable tax credits that can save you thousands of dollars annually.
Learning Objectives:
- Master the strategic decision between standard and itemized deductions for maximum tax savings
- Identify and claim all eligible tax credits that directly reduce your tax liability
- Understand business and self-employment deductions to maximize entrepreneurial tax benefits
- Implement advanced deduction strategies including charitable giving and expense bunching
Understanding the Choice
Every taxpayer gets to choose between the standard deduction and itemized deductions. You should itemize only if your total itemized deductions exceed the standard deduction.
2025 Standard Deduction Amounts:
- Single filers: $15,750
- Married filing jointly: $31,500
- Married filing separately: $15,750
- Head of household: $23,650
- Additional for age 65+: $6,000 per person ($12,000 for married couples)
Major Itemized Deduction Categories:
1. State and Local Tax (SALT) Deduction
Thanks to the One Big Beautiful Bill, the SALT deduction has been significantly enhanced for 2025:
- Deduction limit: $40,000 (increased from $10,000)
- Phase-out: Begins at $500,000 AGI
- Includes: State income tax, local income tax, property tax, and sales tax (choose income or sales tax, not both)
Strategy Tip: If you're near the threshold, consider timing property tax payments or estimated state tax payments to maximize the deduction in high-income years.
2. Mortgage Interest Deduction
- Mortgage interest on acquisition debt up to $750,000 ($375,000 if married filing separately)
- Interest on home equity loans up to $100,000 if used to improve the home
- Points paid on home purchase are deductible in the year paid
3. Charitable Contributions
- Cash donations: Deductible up to 60% of AGI
- Appreciated securities: Deductible at fair market value, avoid capital gains tax
- Special deduction for non-itemizers: $300 cash donations (extended through 2025)
Advanced Charitable Strategies:
- Bunching: Combine multiple years of donations into one year to exceed standard deduction
- Donor-Advised Funds: Get immediate deduction, distribute over time
- Qualified Charitable Distribution (QCD): Ages 70½+ can donate up to $100,000 directly from IRA
4. Medical and Dental Expenses
- Deductible when they exceed 7.5% of your AGI
- Include premiums, treatments, prescriptions, medical travel
- Qualified medical expenses are broader than most people realize
5. Other Itemized Deductions
- Casualty and theft losses from federally declared disasters
- Tax preparation fees (eliminated 2018-2025, but returning in 2026)
- Investment expenses (also eliminated but returning)
Tax credits provide dollar-for-dollar reductions in your tax liability, making them more valuable than deductions.
Child Tax Credit
- Amount: $2,000 per qualifying child under 17
- Refundable portion: Up to $1,500 per child
- Phase-out: Begins at $200,000 AGI (single) or $400,000 (married filing jointly)
- Additional Child Credit: May get refund even if you owe no tax
Earned Income Tax Credit (EITC)
One of the most valuable credits for working families:
- Maximum credit (2025):
- No children: $600
- One child: $3,995
- Two children: $6,604
- Three+ children: $7,430
- Income limits vary by filing status and number of children
- Fully refundable: Can receive refund even if you owe no tax
Education Credits
- American Opportunity Tax Credit: Up to $2,500 per student for first four years of college
- 40% refundable (up to $1,000)
- Covers tuition, fees, and course materials
- Lifetime Learning Credit: Up to $2,000 per tax return
- For any post-secondary education or job skills courses
- Not refundable
Saver's Credit (Retirement Savings Contributions Credit)
- Credit amount: 10%, 20%, or 50% of contributions to retirement accounts
- Maximum credit: $1,000 (single) or $2,000 (married filing jointly)
- Income limits (2025):
- 50% credit: AGI up to $23,250 (single) or $46,500 (married)
- 20% credit: AGI up to $25,250 (single) or $50,500 (married)
- 10% credit: AGI up to $38,250 (single) or $76,500 (married)
Energy Efficiency Credits
- Solar energy credit: 30% of installation costs through 2032
- Heat pump credit: Up to $2,000
- Energy-efficient home improvement credit: Up to $1,200 annually for qualifying improvements
- Electric vehicle credit: Up to $7,500 for new EVs, up to $4,000 for used EVs
Self-Employment Tax Deduction
- Deduct 50% of self-employment tax as an adjustment to income
- Applies to the employer-equivalent portion of SE tax
- Calculated automatically on Schedule SE
Home Office Deduction
Two methods available:
- Simplified method: $5 per square foot, up to 300 square feet (maximum $1,500)
- Actual expense method: Percentage of home used exclusively for business
Requirements: Space must be used regularly and exclusively for business
Business Vehicle Expenses
Choose between:
- Standard mileage rate (2025): $0.67 per business mile
- Actual expense method: Depreciation, gas, insurance, repairs × business use percentage
Business Equipment and Supplies
- Section 179 deduction: Up to $1,160,000 for equipment purchases in 2025
- Bonus depreciation: 60% of eligible property in 2025 (phases out through 2027)
- Office supplies, software subscriptions, professional development
Business Meals and Entertainment
- Business meals: 50% deductible
- Client entertainment: Generally not deductible
- Employee holiday parties: 100% deductible
- Calculate Itemized vs. Standard: Add up your potential itemized deductions to compare with standard deduction
- Maximize Charitable Giving: If itemizing, consider bunching charitable donations to exceed standard deduction threshold
- Track Business Expenses: Set up a system to track all business-related expenses throughout the year
- Review Credit Eligibility: Check income thresholds for education credits, EITC, and other credits
- Plan Medical Expenses: If approaching 7.5% AGI threshold, consider timing elective medical procedures
Deductions and credits work together to minimize your tax liability, but they operate differently. Deductions reduce your taxable income (saving you your marginal tax rate), while credits reduce your tax owed dollar-for-dollar.
The key strategic decision each year is whether to itemize or take the standard deduction. With the enhanced SALT deduction limit in 2025, more taxpayers may benefit from itemizing. Credits should be maximized whenever possible, especially refundable credits like the EITC and portions of the Child Tax Credit.
For business owners and self-employed individuals, meticulous record-keeping and understanding of business deductions can result in significant tax savings.
Next Module Preview: We'll explore advanced tax planning strategies including tax-loss harvesting, income timing, asset location strategies, and sophisticated techniques that can save high-net-worth individuals substantial amounts in taxes.