Tax Deductions & Credits

Tax credits offset the taxes you owe on a dollar-for-dollar basis, but deductions are offset against your income. Make sure you don’t miss a single credit you are eligible for. Then add up the deductions you could itemize and see if they will amount to more than the standard deduction.

A dependent child or other relative can be worth thousands of dollars of reduction in your tax bill through benefits such as the child tax credit, earned income tax credit, child and dependent care credit and other tax breaks. Learn them all. Divorced parents have to decide which parent gets the tax benefit.

If you’re single or in some stage of separation you could benefit financially from filing as head of household. Key benefits are a more favorable tax rate and a higher standard deduction. To qualify, you must provide more than 50% of the cost of supporting a dependent such as a child, parent or sibling.

You can take these special deductions even if you don’t itemize your taxes and instead take the standard deduction. These include deductions for retirement plan contributions, contributions to Health Savings Accounts and Archer Medical Savings Accounts, health insurance premiums if you’re self-employed, and expenses if you’re an educator.

As owner of a rental property, you can deduct the costs of owning, maintaining, and operating it. Depreciation for most residential property is at the rate of 3.636% per year for 27.5 years—the IRS’s definition of a property’s “useful life.” You can’t depreciate the land, only the building. Tax treatment of income and losses depends on your level of involvement in property management—material participation, active participation, or passive activity.

Private mortgage insurance (PMI), sometimes known as the mortgage insurance premium (PMI) was first banned starting in tax year 2018. The Further Consolidated Appropriations Act of 2020 allowed MIP and PMI tax deductions for 2020 and retroactively for 2018 and 2019. But after that, these insurance payments are not deductible unless Congress acts again. Other limitations to taking the deduction applied, including income limitations.