Credits vs deductions: understand the difference
Tax credits reduce your tax bill dollar-for-dollar. Deductions reduce your taxable income. Credits are almost always more valuable.
📈 Tax Credits (Better)
Direct tax reduction
$1,000 credit = $1,000 less tax owed
Types available
Child tax credit, earned income credit, education credits
Refundable vs non-refundable
Some can create refunds beyond what you paid in taxes
📊 Tax Deductions
Reduces taxable income
$1,000 deduction = $220-370 tax savings (depending on bracket)
Above vs below the line
Above-the-line deductions reduce AGI, more valuable
Standard vs itemized
Take whichever is higher for your situation
High-impact tax credits
Child Tax Credit (US)
- • $2,000 per child under 17 (2024)
- • Up to $1,700 refundable (Additional Child Tax Credit)
- • Income limits: Phases out starting at $200K (single) / $400K (married)
- • Requirements: Child must be US citizen, live with you 6+ months
Earned Income Tax Credit (EITC)
- • Maximum $7,830 with 3+ children (2024)
- • Fully refundable - can exceed taxes owed
- • Income limits vary by filing status and number of children
- • Work requirement: Must have earned income from employment
Education Credits
- • American Opportunity Credit: $2,500/year (40% refundable)
- • Lifetime Learning Credit: $2,000/year (non-refundable)
- • Income limits: Phase out at higher incomes
- • Cannot claim both for same student in same year
Retirement account strategies
| Account Type | 2024 Limit | Tax Benefit | Best For |
|---|---|---|---|
| 401(k) Traditional | $23,000 (+$7,500 if 50+) | Immediate deduction | High current tax bracket |
| 401(k) Roth | $23,000 (+$7,500 if 50+) | Tax-free growth | Lower current tax bracket |
| Traditional IRA | $7,000 (+$1,000 if 50+) | Deduction (income limits) | No 401(k) or low income |
| Roth IRA | $7,000 (+$1,000 if 50+) | Tax-free withdrawals | Under income limits |
| HSA | $4,300 individual / $8,550 family | Triple tax advantage | HDHP participants |
Advanced strategies
Tax-Loss Harvesting
Sell losing investments to offset capital gains
$3,000 annual limit on losses against ordinary income
Watch wash sale rules (30-day restriction)
Carry forward unused losses to future years
Backdoor Roth Strategy
Contribute to non-deductible traditional IRA
Convert to Roth IRA immediately
Avoids income limits for Roth contributions
Watch pro-rata rule if you have other traditional IRAs
Charitable Giving Strategies
Donate appreciated assets instead of cash
Bunch donations in alternating years
Use donor-advised funds for timing flexibility
Qualified Charitable Distribution from IRA (70.5+)
Regional variations
🇺🇸 United States
State tax considerations
SALT deduction cap ($10,000), state-specific credits, municipal bond interest
Health Savings Accounts
Triple tax advantage: deductible, growth tax-free, withdrawals tax-free for medical
🇨🇦 Canada
RRSP contributions
18% of previous year income, maximum $31,560 (2024), carry forward unused room
TFSA maximization
$7,000 annual limit (2024), tax-free growth and withdrawals
🇬🇧 UK
ISA allowances
£20,000 annual allowance (2024-25), tax-free growth and withdrawals
Pension contributions
Annual allowance £60,000, tax relief at marginal rate
Year-end planning
Maximize retirement contributions
401(k) deadline: Dec 31. IRA deadline: Tax filing deadline (April 15)
Execute tax-loss harvesting
Sell losing positions before Dec 31, but watch wash sale rules
Bunch deductible expenses
Prepay January mortgage, make charitable donations, schedule medical procedures
Consider Roth conversions
Convert traditional IRA to Roth in low-income years
⚠️ Common Tax Planning Mistakes
- • Waiting until tax season: Many strategies require year-end action
- • Focusing only on federal: Ignoring state tax implications
- • Not tracking basis: Overpaying on capital gains due to poor records
- • Assuming higher income = higher taxes: Tax-advantaged accounts can change this
- • Ignoring tax-free growth: Underestimating value of Roth accounts and HSAs
💡 Pro Tip
Track your marginal tax rate throughout the year. If a promotion or side income pushes you into a higher bracket, accelerate deductions and delay income when possible. If you're in a lower bracket this year, consider Roth conversions.
Frequently Asked Questions
Should I prioritize tax credits or deductions?
Always prioritize tax credits since they reduce taxes dollar-for-dollar. Then focus on above-the-line deductions, retirement contributions, and finally itemized deductions if they exceed the standard deduction.
How much should I contribute to retirement accounts?
At minimum, contribute enough to your 401(k) to get the full employer match. Then consider maxing out HSA, then Roth IRA (if eligible), then remaining 401(k) space, based on your tax situation and goals.
Is it worth hiring a tax professional?
Consider professional help if you have complex investments, own a business, experienced major life changes, or your potential tax savings exceed the cost of professional help (typically $200-1000+).
Can I reduce taxes if I'm already retired?
Yes. Manage withdrawal timing from different account types, use tax-loss harvesting, consider charitable giving strategies, and plan Roth conversions in lower-income years.