23 Tax Breaks & Deductions For 2023 and 2024 Taxes

We all know that taxes are an unfortunate — but necessary — part of modern living. Thankfully, there are ways to make this obligation less painful: tax deductions, which are ways to reduce the amount of tax you pay via specific deductions and tax credits when you file your tax return.

In order to take advantage of these tax breaks, you’ll need a strong knowledge of the specific ways of reducing your obligations. In this article, we’ll explain the various ways you can reduce your taxes.

What Is A Tax Deduction And How Do Deductions Work?

A tax deduction is an expense that can be subtracted from your taxable income to reduce your tax bill. When your taxable income is lower, your tax bill is lower, too. The Internal Revenue Code, also called the Tax Code, provides a wide variety of common tax deductions that taxpayers can claim.

Standard Deductions Vs. Itemized Deductions

When you take advantage of tax deductions, there are two categories you can use: the standard deduction or itemized deductions. You must choose one or the other; you cannot do both. Here’s what they are:

• Standard deduction: This is a flat deduction that can be taken by anyone, and the amount of that deduction varies according to your filing status. Every year, the IRS sets the standard deduction amount — in most tax years, the rate is slightly higher than the year before due to inflation. For instance, the standard deduction for someone filing a separate return as a head of household in 2022 was $12,950; in 2023, that number was $13,850. The standard deduction is a simplified way to lower your taxable income, and it reduces the income subject to taxation without requiring you to itemize specific expenses.
• Itemized deductions: When a taxpayer tracks deductible transactions, it means they are specifically deducting certain costs — such as medical expenses, mortgage interest or charitable contributions — from their tax returns. It’s a more complicated way of paying taxes, but it can help you reduce your taxable income.

Keep in mind you can also use the Rocket Money℠ app to keep track of your deductible transactions throughout the year. To do so, simply click the individual transaction within the app — or on the web — and select the “Tax Deductible” toggle so you can pull up and export a list of all your deductible transactions come tax time.

Tax Write-Offs Vs. Deductions Vs. Tax Credits

There are several ways to reduce your tax liability, and they differ in critical ways. These methods include:

• A tax write-off encompasses various expenses you can deduct from your taxable income. Write-offs can include deductions (more on those in a moment), but they also cover losses such as investment depreciation.
• A tax deduction refers to an expense that reduces your taxable income, thereby lowering the amount of your income that subject to taxation. Deductions are subtracted from your gross income and create your adjusted gross income.
• A tax credit is an amount of money that you can subtract from your tax liabilities, directly reducing the amount of tax you owe. So, for instance, if you owed $10,000 in taxes but have a tax credit for $6,000, then you would only be required to pay $4,000 in taxes that year.

Common Tax Deductions And Credits For Tax Year 2023 And 2024

There are many types of deductions and credits that can help you achieve federal income tax breaks. We’ve created a list of some but consider consulting with a financial professional to ensure you are eligible for different tax breaks and learn state and local tax rules.

1. Children and Dependents

The federal government allows parents to claim some tax credits to offset the costs of raising children.

Child- and Dependent Care Credit

This credit is designed to alleviate the financial burden of child- or dependent care expenses that come up while the caregiver is working or seeking employment. It allows eligible taxpayers to claim a percentage of their qualifying care expenses, such as daycare costs, as a credit on their tax return. It should be noted that the credit has specific limits and criteria based on factors including the amount spent, the number of dependents and the taxpayer's income.

Adoption Credit

The adoption tax credit is geared toward taxpayers who adopt or start the adoption process. It can help cover some of the expenses related to the adoption, such as fees, travel and legal costs. It should be noted that the credit is subject to income limits, which means it is reduced or eliminated for taxpayers whose adjusted gross income is above a certain amount.

Child Tax Credit (CTC)

The child tax credit (CTC) was first enacted as part of the Taxpayer Relief Act of 1997, as a $500 nonrefundable credit. The credit is for taxpayers who have — and support — children, and the amount of credit varies depending on such factors as the children’s ages.

The CTC is partially refundable, which means that it can actually lower your tax bill below $0 and you can receive a portion of the credit when you file your taxes.

2. Education and Student Debt

Another useful way to reduce your tax debt is to take advantage of tax breaks based on education costs and the ensuing student debt.

American Opportunity Tax Credit (AOTC)

The American Opportunity Tax Credit (AOTC) is designed for eligible students who pay qualified education expenses for the first four years of higher education. The credit is worth up to $2,500 per year and has a refundable portion of 40%, meaning it can create a tax refund of up to $1,000 if you owe no taxes.

Student Loan Interest Deduction

The student loan interest deduction allows you to deduct up to $2,500 of the interest you paid on a qualified student loan. The deduction is non-refundable, however, and subject to income limits and phase-out rules, which means it may be reduced or eliminated depending on your income level and filing status.

Lifetime Learning Credit

The Lifetime Learning Credit (LLC) allows you to claim 20% of the qualified education expenses you paid for yourself, your spouse or your dependent during the year. The maximum amount of the credit is $2,000 per tax return, and the credit can help you pay for undergraduate, graduate or professional courses, as well as studies that help you improve your job skills.

You should know, however, that the credit does not cover expenses such as room and board, insurance, medical expenses, transportation or personal expenses.

3. Homeownership

If you own a home, there are several ways you can reduce your tax burden. They include:

Mortgage Interest Tax Deduction

This deduction allows you to subtract the interest you paid on a qualified mortgage from your taxable income. The deduction is available for mortgages on your primary or second home, up to a certain limit depending on when you obtained the loan. The deduction can lower your tax liability or increase your refund, but it requires itemizing on your tax return.

Be mindful, however, that the Tax Cuts and Jobs Act reduced the limit for the deduction and increased the standard deduction, making it less beneficial for some taxpayers.

Mortgage Insurance Deduction

This tax benefit that allows you to deduct the interest you paid on private mortgage insurance (PMI) from your taxable income. As a reminder, PMI is a type of insurance that many lenders require if you make a down payment of less than 20% on your home loan.

The deduction is available for mortgages on your primary or second home, up to a certain limit depending on when you obtained the loan.

Home Improvement Deduction

Improvements you make to your home that are considered necessary or beneficial for energy efficiency can qualify for a tax deduction under the Energy Efficient Home Improvement Credit. This credit allows you to deduct 30% of the costs for eligible home improvements made from 2023 to 2032, up to a maximum of $3,200 per year.

Some examples of commonly qualifying home improvements are new exterior doors, windows, skylights, insulation and air sealing materials that meet Energy Star or International Energy Conservation Code standards. You may also claim the credit for certain biomass stoves and boilers, electric panels and related equipment, and home energy audits.

Local And State Sales/Property Tax Deduction

You can deduct state and local real estate taxes or sales taxes, but the rules about such moves are complicated. For starters, you can deduct either state and local income taxes, or state and local general sales taxes — but not both. You can also deduct state and local real estate taxes that are based on the value of your property, but your total deduction for state and local income, sales and property taxes is limited to $10,000 ($5,000 if married filing separately) annually.

4. Business Expenses

For people who are self-employed our own their own business, many expenses are deductible, including:

Home Office Expenses

If you own your own business and use part of your home for business purposes, you may be able to deduct some of the home expenses, including: mortgage interest, insurance, utilities, repairs and depreciation.

Self-Employment Expenses

Anyone who is considered self-employed — for example, you earn your wages without a full-time employer — needs to pay self-employment tax. Different forms of self-employment include: gig workers (such as those who work for ride-share companies), contract workers or freelancers, sole proprietors or small-business owners.

If you are a member of this group, you can deduct some self-employment-related expenses, including: home office costs, health insurance, self-employment tax costs and contributions made toward qualified retirement plans.

5. Medical Expenses

Medical expenses can be costly today, but thankfully there are ways to deduct them from your tax obligations.

Medical Expenses Deduction

Self-employed people may be able to deduct health insurance premiums, but you cannot deduct any premiums that are more than your net profit from self-employment. You may also deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income.

Health Savings Account (HSA) Contributions

If you establish a health savings account, your contributions are tax-deductible and reduce your taxable income. In addition, the interest and earnings on your HSA are tax-free.

6. Retirement Plans

To ensure a comfortable financial future, it’s important to establish a sound retirement plan. Thankfully, you can deduct some of the costs that come with saving for retirement.

Saver’s Credit

The tax saver’s credit (also known as the retirement savings contributions credit) is a tax benefit for low- and moderate-income taxpayers who are putting aside money for retirement. The credit is based on the amount of eligible contributions you make to a qualified retirement plan, such as an IRA or a 401(k).

The credit rate ranges from 10% to 50% of your contributions, depending on your adjusted gross income and filing status. To put it simply, the lower your income, the higher your credit rate.

Deduction For 401(k) Contributions

When you have a 401(k) plan, your contributions to your 401(k) are tax deferred, meaning you don't pay taxes on them until you withdraw. The other key tax benefit is that you make contributions to your 401(k) before you pay taxes each year, which allows you to deduct those contributions that same year. This lowers your taxable income for the year, saving you even more money.

There are, however, limits on how much you can contribute to a 401(k) plan — in 2023, that figure was $22,500. In 2024, the amount rose to $23,000.

Individual Retirement Account (IRA) Contributions

Another popular way you can save for your golden years is via an individual retirement account (IRA), which allows you to deduct any contributions you make on your taxes for that year — effectively lowering your taxable income.

It’s important to note that although you’re getting a tax deduction now, you will have to pay taxes on that money eventually. Once you retire and start receiving regular distributions from your traditional IRA, you’ll pay taxes on the money as you would any other income; how much you’ll pay will depend on which tax brackets you belong to. The amount of money you can contribute to an IRA varies by age and is limited each year — in 2023, the allowable amount was $6,500 for people under 50 and $7,500 for people older than 50; in 2024, it was raised to $7,000 for people under 50 and $8,000 for people older than 50.

7. Clean Energy Tax Breaks

In an effort to incentivize environmentally responsible behavior, the federal government offers tax breaks for clean energy improvements. They include:

Electric Vehicle Tax Credit

If you purchase an electric vehicle (EV), you can get tax credits that will help offset your tax obligation. Unfortunately, the tax credit system is very complicated and involves such variables as where you will drive the car, its battery size, your tax status and more. To gain a better understanding of this complex system, it’s best to go to the IRS website.

Additionally, beyond federal credits, state and local governments may offer their own incentives, such as rebates, tax credits or exemptions.

Residential Clean Energy Credit

The Residential Clean Credit allows homeowners to claim a percentage of expenses related to clean energy improvements in their primary residences such as solar panels, wind turbines, geothermal heat pumps and other qualifying clean energy technologies. This credit covers 30% of the costs of new, qualified clean energy property for your home installed anytime from 2022 through 2032. The credit percentage rate drops to 26% for property placed in service in 2033 and 22% for property placed in service in 2034.

Additionally, various state and local governments offer their own clean energy incentives, such as rebates or additional tax credits.

8. Miscellaneous Tax Breaks

The government also offers other tax breaks that can help you reduce your overall tax burden, and they range from charitable donations to reductions based on your profession.

Earned Income Tax Credit

The earned income tax credit (EITC) is a refundable tax credit that's available for low- to moderate-income taxpayers. Depending on your financial situation, the EITC can reach up to nearly $8,000. The amount you qualify for will depend on eligibility criteria such as the number of children you have (if any), your income and your tax filing status. In 2024, the EITC for taxpayers without children will be $632 and $7,830 for people who have three or more children.

Charitable Contributions Tax Breaks

It’s always good to be generous with charities, and you can even gain a tax break for such altruism. Eligible charitable donations can help you reduce your taxable income, which can help you pay less in taxes. Tax-deductible donations include gifts of cash, assets or property to a qualifying organization. The amount you’ve donated can then be itemized on your tax return and will reduce your taxable income. If you donated an asset or property, you can deduct the current fair market value in your tax return.

Tax Deductions for Teachers

Teachers can deduct several hundred dollars annually for unreimbursed classroom expenses, including supplies, books, computer equipment and software used for educational purposes. This deduction is available even if you don't itemize deductions on your tax return, but gathering and keeping receipts and records of these expenses is crucial if you take advantage of this benefit.

Deduction for Gambling Losses

Gambling losses can be deducted as itemized deductions, but only up to the amount of your gambling winnings. And if you’re going to claim these losses, you must be able to present detailed records including receipts, tickets or other documentation.

The Bottom Line: If You Itemize, Research Your Tax Deduction and Tax Credit Options

In summary, you can reduce your tax burden if you itemize your deductions — but it’s not easy. This is a complicated path, and the more you know, the more you can save. That’s why it makes sense to track your expenses with the Rocket Money app, which can help you track your spending habits and create a strong financial future.