While both tax deductions and tax credits reduce your overall tax liability, they work differently. Tax deductions reduce your taxable income before tax rates are applied. For example, a $1,000 deduction in the 22% tax bracket would save you $220 in taxes. Tax credits, on the other hand, directly reduce your tax bill dollar-for-dollar after all calculations are complete. A $1,000 tax credit would reduce your taxes by the full $1,000, regardless of your tax bracket. Generally, tax credits provide more significant tax benefits than deductions of the same amount.

For employees (W-2 workers), home office expenses are no longer deductible under current tax law. However, self-employed individuals (including independent contractors, freelancers, and small business owners) can still claim the home office deduction if they use part of their home regularly and exclusively for business purposes. There are two methods for calculating this deduction: the simplified method (allowing $5 per square foot up to 300 square feet) or the regular method (calculating the actual expenses based on the percentage of home used for business). Eligibility requirements include having a specific area of your home used solely for business and using this space regularly for business activities.

Charitable donations are only tax-deductible if you itemize deductions and donate to qualified organizations. The IRS maintains a database of eligible organizations that qualify for tax-deductible contributions (known as 501(c)(3) organizations). Religious organizations, nonprofit educational institutions, and many community service organizations typically qualify, but donations to individuals, political organizations, or foreign charities generally do not. Additionally, you must maintain proper documentation—a bank record, receipt, or acknowledgment letter from the charity for any contribution. For donations of $250 or more, written acknowledgment from the organization is required. For non-cash donations valued over $500, additional forms and documentation requirements apply. Remember that the value of any goods or services you receive in exchange for your donation must be subtracted from your deduction amount.

Medical expense deductions only apply to costs exceeding 7.5% of your adjusted gross income (AGI) and only if you itemize deductions. For example, if your AGI is $60,000, only medical expenses beyond $4,500 (7.5% of $60,000) would be deductible. Qualifying expenses include payments for diagnosis, treatment, prevention, and medical transportation, as well as premiums for health and qualified long-term care insurance not paid through pre-tax employer plans. Expenses reimbursed by insurance or paid with funds from tax-advantaged health accounts (like HSAs or FSAs) cannot be deducted. Common eligible expenses include doctor visits, hospital stays, prescription medications, dental and vision care, medical equipment, and travel costs for medical care (mileage, parking, lodging). Some surprising eligible expenses include home modifications for medical purposes, weight-loss programs prescribed for specific conditions, and certain addiction treatment programs.

Proper documentation is essential for supporting claimed deductions in case of an IRS audit. For each type of deduction, specific records are required. For charitable donations, keep acknowledgment letters from organizations, bank records, and receipts showing donation details. For medical expenses, maintain medical bills, insurance statements, prescription receipts, and records of travel for medical care. Mortgage interest and property taxes require Form 1098 from your lender, property tax statements, and closing statements for home purchases or refinancing. Business-related deductions need receipts, invoices, credit card statements, mileage logs, and documentation of the business purpose for each expense. Education expenses should be supported by Form 1098-T from educational institutions and receipts for qualified expenses like textbooks. The IRS generally requires that you keep tax documentation for at least three years from the filing date, though some circumstances may require longer retention periods. Consider creating both digital and physical filing systems organized by tax year and deduction category for easy retrieval if needed.

Major life events often create new opportunities for tax deductions and credits. When you get married, you may benefit from a larger standard deduction by filing jointly, though this can sometimes create a “marriage penalty” in certain tax brackets. Buying a home typically enables deductions for mortgage interest and property taxes if you itemize. Having children opens up numerous tax benefits, including dependent exemptions, child tax credits, child and dependent care credits, and potential education credits as children grow. Starting a business—even a side hustle—enables various business expense deductions, home office deductions, and self-employment retirement plan contributions. Continuing education may qualify for education credits or deductions for student loan interest. Retirement brings potential for age-based additional standard deductions and different taxation of retirement account withdrawals. Finally, experiencing significant medical issues might allow you to exceed the 7.5% AGI threshold for medical expense deductions. It’s particularly important to review your tax strategy during these transitional periods, ideally with professional guidance.