Cradle-to-Grave Guide to Common Tax Credits and Deductions

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It’s true what they say — nothing in life is guaranteed except death and taxes. However, there are a number of tax deductions and credits you can take advantage of throughout your lifetime to free up extra cash.

We outlined the most common deductions and credits you may be able to qualify for once you reach life’s biggest milestones, like completing higher education, getting married or buying a home.

Tax credits vs. tax deductions

Before we dive in, however, it’s crucial for you to understand the difference between tax credits and tax deductions:

  • A tax credit reduces the amount of tax you owe
  • A tax deduction reduces your taxable income

Tax credits have a much greater impact on reducing your tax load since they are deducted directly off your tax bill. For example, a $2,000 tax credit will result in you owing $2,000 less in taxes this year.

Tax deductions, however, can still help you save money in several ways, including lowering your taxable income so more of your income is taxed at a lower rate.

Your cradle-to-grave tax guide

While you should speak to an accountant to determine which overall tax strategy will work best for your income and circumstances, one of the best ways to save is by making sure you take all the tax deductions and credits that are available to you.

Your School Years

American opportunity tax credit (AOTC)

The American Opportunity Tax Credit (AOTC) is worth up to $2,500 per year and can be used for qualified education expenses incurred during the first four years of college by an eligible student. This credit covers the first $2,000 in qualified education expenses for each eligible student, along with 25% of the next $2,000 you paid ($500) for the same student within a calendar year. If the credit reduces your tax bill to zero, you can have up to 40% of the remaining amount (up to $1,000) refunded to you.

To qualify for the full credit, you must have a MAGI (modified adjusted gross income) of $80,000 or less for singles or $160,000 or less if you’re married filing jointly. Credits are phased out for incomes between $80,000 and $90,000 for single filers and $160,000 to $180,000 for those married filing jointly. You cannot claim the credit for incomes over those amounts.

Students must meet the following requirements:

  • Must be pursuing a degree or education credential
  • Be enrolled at least half time for at least one academic period of the year
  • Not have finished four years of college at the beginning of the year
  • You can’t claim the AOTC or the former Hope credit for more than four tax years
  • No felony drug convictions at the end of the tax year

Lifetime Learning Credit

The Lifetime Learning Credit (LLC) can cover qualified tuition and higher education expenses undertaken by eligible students pursuing higher education in a qualified educational institution. This credit is for undergraduate, graduate, and professional students and is worth up to $2,000 per tax return. Even better, there is no limit on the number of years you can claim this credit.

To qualify, you must

  • Pay for qualified expenses for higher education at an eligible educational institution
  • Be pursuing higher education yourself or have a spouse or dependent pursuing higher education on your tax return
  • Be enrolled in at least one academic period at the beginning of the tax year
  • Have a MAGI below $67,000 for single filers in 2018 and $134,000 if you’re married filing jointly

Note that this credit phases out between $57,000 and $67,000 MAGI for single filers and $114,000 and $134,000 for those married filing jointly. Anyone with incomes over those limits cannot claim this credit.

Student loan interest deduction

If you, your spouse or a dependent on your tax return pays interest on a qualified student loan in 2018, you may be able to deduct the lesser of $2,500 or the amount of interest you paid. This deduction is available for individuals with a MAGI below $80,000 (or $160,000 if married filing jointly). You can also claim this deduction even if you do not itemize on your taxes.

Business deduction for work-related higher education

If you work for someone else or you’re self-employed and you itemize when you file taxes, you may be able to deduct expenses for work-related education. The deduction is worth an “amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses is greater than 2% of your adjusted gross income,” notes the IRS.

To qualify for this deduction, you must be a working individual, itemize your deductions on Schedule A (Form 1040 or 1040NR) if you’re an employee, file Schedule C, Schedule C-EZ, or Schedule F if you’re self-employed, and have qualifying work-related education expenses.

Major Life Moment: Getting Married

While getting married can make a drastic impact on how much you pay in taxes each year, the changes may be more nuanced than it seems. For the most part, your marital taxes will depend on your combined income and tax bracket as well as whether you file separate tax returns or married filing jointly.

A few deductions that can impact your tax load once you get married include:

Increased standard deduction

For the 2018 tax year, the standard tax deduction has been increased to $12,000 for individuals and $24,000 for married couples. These amounts are nearly double what they were in 2017 ($6,350 for singles and $12,700 for married couples filing jointly).

Charitable contributions

If you itemize your taxes and donate money to charity each year, you may be able to deduct some or all of your donations. Your donation must be to a qualified charitable organization as defined by the IRS, and you must keep a written or printed record of the transaction.

Contributions to individuals are never deductible. You can donate items instead of cash (such as a donation of clothing or furniture to a Goodwill Store), but you can only deduct fair market value. If you plan to make a donation of noncash property worth more than $5,000, you’ll need to have a qualified appraisal of the property first and fill out Form 8283, Section B on your tax return.

In 2018, taxpayers can deduct the full amount of their cash donations to charity provided the deduction does not exceed 60% of their adjusted gross income (AGI). If you donate more than 60% of your AGI in a single tax year, you may also be able to carry over amounts to the next five years. This IRS quiz can help you determine if you’re eligible and how much you can deduct in charitable contributions this year.

Your Working Years

Deductions for contributions to qualified retirement accounts

For the 2018 tax year, you can deduct up to $5,500 in contributions to an IRA ($6,500 if you’re ages 55 and older) provided you meet income requirements. Your deduction may be limited if you or your spouse have a retirement plan at work, or if your income exceeds maximums outlined by the IRS.

If you are covered by a retirement plan at work, you can take the full deduction for IRA contributions if you’re single and your MAGI is below $63,000; married filing jointly or a qualifying widower with a MAGI of $101,000 or less, or married filing separately with a MAGI of $10,000 or less. The credit is phased out for single filers with a MAGI between $63,000 and $73,000 and those married filing jointly or qualifying widowers with a MAGI between $101,000 and $121,000. If you’re married filing separately with a MAGI over $10,000 you do not qualify for this deduction.

If you do not have a retirement plan at work, deductions for IRA contributions are limited to:

  • Single, head of household, or qualifying widower: Take the full deduction up to the amount of your contribution limit.
  • Married filing jointly or separately with a spouse who is not covered by a plan at work: Take the full deduction up to the amount of your contribution limit.
  • Married filing jointly with a spouse who does have a retirement plan at work: Take a full deduction if your MAGI is $189,000 or less, a partial deduction if your MAGI is between $189,000 and $199,000, and no deduction if you MAGI is $199,000 or more.
  • Married filing separately with a spouse that is covered with a plan at work: Take a partial deduction if your MAGI is less than $10,000 and no deduction if your MAGI is higher than that.

If you have a 401(k), SEP IRA, Solo 401(k), or another type of employment-based retirement plan, you can deduct amounts you contribute on your taxes up to certain limits. Those limits are as follows for 2018 (and 2019):

 2018 tax year2019 tax year
401(k)$18,500$19,000
403(b)$18,500$19,000
SEP IRA25% of employee compensation up to $55,000 in 2018 25% of employee compensation up to $56,000 in 2019
Simple IRA$12,500$13,000
SARSEP Plans (Simplified Employee Pension)25% of employee compensation up to $55,000 in 2018 25% of employee compensation up to $56,000 in 2019
One participant 401(k) plans, including Solo 401(k)$18,500 or $24,500 if age 50 and older, but a self-employed business owner can also contribute another 25% of compensation as defined by the plan up to $55,000 total$19,000 or $25,000 if age 50 and older, but a self-employed business owner can also contribute another 25% of compensation as defined by the plan up to $56,000 total

Individuals age 50 and older may also contribute an additional $6,000 per year to their retirement account if they have a 401(k), 403(b), SARSEP or governmental 457(b). Catch-up contributions for Simple IRA or Simple 401(k) plans are limited to $3,000 through 2019. As mentioned already, individuals age 50 and older can also contribute an additional $1,000 toward an IRA as a catch-up contribution.

Earned income tax credit

While the earned income tax credit (EITC) is available to all workers who qualify, the effect is more notable for those who have children. This credit is available to people who work for themselves or someone else who meet certain income requirements, and the amount of the credit increases when you claim more children as dependents.

In 2018, the EITC is limited to:

  • $6,431 with three or more qualifying children
  • $5,716 with two qualifying children
  • $3,461 with one qualifying child
  • $519 with no qualifying children

Income limits to qualify for the credit are as follows:

 No childrenOne childTwo childrenThree or more children
Single, Head of Household, or Widowed$15,270$40,320$45,802$49,194
Married Filing Jointly$20,950$46,010$51,492$54,884

You must also have $3,500 or less in investment income per year to qualify for this credit.

Qualified transportation fringe benefit

Employees who work for an employer who offers qualified transportation fringe benefits may receive up to $260 per month for transit vouchers or commuter highway vehicle fares and another $260 per month for work-related parking fees.

Saver’s credit

For the 2018 tax year, you may be eligible for the Saver’s credit if your income is below certain limits and you contribute to a qualifying retirement account such as an IRA or employer-sponsored account. You may be eligible if you’re age 18 or older, not a student and not a dependent on anyone’s tax returns.

The credit can be worth 50%, 20%, or 10% of your retirement plan contributions depending on your income, with a maximum credit amount of $2,000 (or $4,000 if you are married and filing jointly).

To receive the 50% credit return for the 2018 tax year, your AGI must not be more than $38,000 if you’re married filing jointly, $28,500 if you’re head of household, or $19,000 for all other filers. In 2019, those income limits change to $38,500, $28,875 and $19,250 respectively.

State and Local Taxes Deduction (SALT)

The SALT tax deduction allows individuals to deduct state and local taxes (including property taxes) from the income they report on their federal taxes. The value of the SALT deduction is capped at $10,000 as of 2018. Also note that this deduction is only available to people who itemize.

Home office deduction

If you work out of an office in your home, you may be able to deduct some of your qualified business expenses. This deduction can be used by homeowners and renters alike, and it applies to all types of homes. You must report regular and exclusive use to use this credit, however, and your home must be the primary location where your business is run.

Generally speaking, deductions for a home office are based on the percentage of the home you use for business purposes. And while the IRS offers a standard method for computing the deduction, busy small-business owners may want to consider the simplified option.

Major Life Moment: Buying a Home

Mortgage interest tax deduction

If you itemize when you file your taxes, you may be able to deduct interest you pay on your home mortgage. For the 2018 tax year, however, the limit on home loans you can deduct interest on has been reduced. You can now deduct the mortgage interest on up to $750,000 of debt for home loans, or $375,000 if you’re married but filing a separate return.

According to the IRS, this deduction can also apply to home equity loans and HELOCs provided the funds you borrow are used to “buy, build or substantially improve the taxpayer’s home that secures the loan.”

Tax savings for points

If you paid “points” to your lender when you took out a home mortgage to reduce your interest percentage, you may be able to deduct the amount spent on your taxes as part of your mortgage interest tax deduction in the year you pay them. This deduction is usually available provided the loan is secured by your home, the amount of points you pay is typical for where you live, and the cash you paid at closing in your down payment equals the points.

Residential Energy Efficient Property Credit

You may be able to take a special tax credit when you make energy efficient improvements to your home. To qualify, you must have lived in the home for the year and it must be your primary residence.

According to the IRS, this tax credit is currently offered on “qualified solar electric property, solar water heating property, small wind energy property, geothermal heat pump property, and fuel cell property.” This also includes labor costs and money spent on wiring or piping needed to connect the device to your home. The credit is for up to 30% of your costs. For qualified fuel cell property, the credit is limited to $500 “for each one-half kilowatt of capacity of the property.”

Property tax deduction

Homeowners who itemize their tax returns can deduct up to $10,000 per year in state and local income taxes (SALT) as we mentioned above, and this includes property taxes. This deduction is good for property taxes you pay starting on the date you purchased your home. However, it is not applicable to seller’s delinquent property taxes from the prior year at the time you close on the sale of your home.

Keep in mind, however, that you can only deduct property taxes themselves on your return, and that this amount may be different than amounts withheld for property taxes and homeowners insurance in your mortgage escrow account.

Your Caregiving Years

Child tax credit

The tax credit for having a dependant child goes up to $2,000 per child in 2018 for dependents under the age of 17. The MAGI income threshold for this credit is $400,000 for couples filing jointly and $200,000 for individual filers. Taxpayers with incomes over those amounts are subject to a phase out of the credit.

According to the IRS, up to $1,400 of the credit can be refundable for each qualifying child, meaning you could receive a refund even if you don’t owe any taxes.

Also note that you may be able to receive a tax credit for other dependents. This credit is a non-refundable tax credit of up to $500 for qualifying dependants that are a U.S. citizen, U.S. national, or a U.S. resident alien.

Child and dependant care credit

You may be able to deduct some of your child care expenses if paying for dependent care allowed you to work and earn an income. The limit on the child and dependant care credit is $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals. You are not eligible to take this credit if you are married filing separately.

Also note that noncustodial parents that claim a child as a dependent may not be able to claim the child and dependent care credit since the children of divorced parents may be treated as a qualifying individual for the custodial parent.

Adoption credit

For adoptions finalized in 2018, adoptive parents may be able to deduct up to $13,810 per child. This credit is nonrefundable, meaning you won’t receive this amount if you don’t owe any tax. However, parents can carryover any unused credit from one year to the next.

An eligible child is any child you adopted under the age of 18, and the credit applies to any adoption-related expenses parents incur. However, income limits apply and reduce the number of people who can qualify for this credit. In 2018, those with a modified adjusted gross income (MAGI) over $247,140 cannot claim the credit. Those with a MAGI between $207,140 and $247,140 can claim a partial credit.

Child and dependant care credit

This credit applies to both care for a child or care for an aging parent that is your dependent, and it hinges on whether or not you paid someone for help. For example, If you did pay for elderly care for a dependent parent during the tax year, you may be able to qualify for up to $3,000 in tax credits.

Major Life Moment: Moving

Deduction for moving expenses

You may be able to deduct moving expenses on your taxes provided you moved for a business-related reason (such as changing jobs), your move date is close to the date your work situation changes, you’re moving at least 50 miles further than your old job was from your old place of employment and you have worked 39 weeks at your new job after your arrival in the new area. However, you don’t have to satisfy the distance or time tests if you’re a member of the Armed Forces.

This quiz from the IRS can help you determine whether you’re eligible to deduct moving expenses and if so, how much. Also note that you cannot deduct moving expenses reimbursed by your employer if they are excluded from your income.

Capital gains exclusion from a home sale

If you lived in your primary residence for at least two of the last five years and decide to sell, you may be able to exclude $250,000 of profits earned from the sale (for individuals) or $500,000 of profits earned from the sale (for couples married filing jointly).

Bonus: Medical expenses

Medical expenses tax deduction

If you wound up with considerable medical expenses during 2018, the IRS allows you to deduct any that exceed 7.5% of your adjusted gross income (AGI). Starting in 2019, however, taxpayers can only deduct the amount of the total unreimbursed expenses that exceed 10% of their AGI.

These expenses can include preventative care, psychiatric treatment, surgeries, dental care, prescription medications, and other qualified medical expenses like glasses, contacts, hearing aids and dentures. To claim this deduction, you have to itemize when you file your taxes.

Credit for the Elderly or the Disabled

If you are age 65 or older or retired on permanent and total disability, you receive taxable disability income within the tax year, and you have an income below certain limits, you could qualify for the tax credit for the elderly or the disabled.

Income limits for this credit depend on whether your spouse is living or lived part of the year, your age, and whether you are on permanent and total disability, but they are generally low. If, for example, you are single, head of household, or a qualifying widower, you can’t have an AGI over $17,500 and the total of your nontaxable social security and other nontaxable pension(s), annuities, or disability income cannot be more than $5,000.

Healthcare premium tax credits

When you buy a health insurance plan in the Health Insurance Marketplace at Healthcare.gov (or in your state exchange if they have one), you may qualify for healthcare premium tax credits depending on your income and other factors. This credit is refundable, meaning you can receive it back even if you don’t owe tax. However, the size of your credit is offered on a sliding scale based on income and varies depending on the price of healthcare plans in your state or municipality.

You must report a MAGI of more than 100% and less than 400% of the federal poverty limit for your family size to qualify for this credit. Those whose incomes fall within this range will receive all or part of the tax credit depending on their income, their family size, and other factors. While the total amount of these credits can vary, bigger credits tend to go to those with the lowest incomes.

As an example, a family of four with a MAGI of $100,400 in 2018 would be ineligible for a premium tax credit since their income is 400% of the Federal Poverty Limit (FPL) that year.

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Holly Johnson
Holly Johnson |

Holly Johnson is a writer at MagnifyMoney. You can email Holly here

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