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#201: Tax Deductions 101

Season #1

Joshua and Amelie break down the basics of tax deductions and tax credits, offering a simple, high‑level overview to help listeners understand how these tools may reduce their tax bill. 

Top takeaways:

  • Tax deductions and tax credits both help you pay less in taxes, but they work differently
    • Tax credits offer a dollar‑for‑dollar reduction in your taxes owed— the government treats you as if you paid that amount in taxes.
    • Tax deductions reduce the amount of income the IRS considers taxable.
  • The value of a deduction depends on your tax bracket; higher‑income earners generally benefit more because of progressive tax rates
  • In some cases, you can choose between claiming something as a tax credit or a tax deduction
  • When comparing “above the line” and “below the line” deductions, the “line” refers to your Adjusted Gross Income (AGI).
  • Above the line deductions (adjustments to income) reduce your AGI, which can affect eligibility for certain benefits and credits.
    • Common above the line deductions include retirement contributions (like 401(k)s) and legitimate business expenses 
  • Below the line deductions are taken as either the standard deduction or itemized deductions (such as charitable giving or state taxes)
  • MAGI (Modified AGI) is used throughout the tax code, but calculating it can be complex and varies by program — tax professionals handle this best
  • A tax professional can sometimes help you legally shift deductions from below the line to above the line
  • Nearly everyone can benefit from working with a qualified tax professional
  • Many valuable tax credits exist for people with low income, but they’re often missed when taxes aren’t filed or are filed incorrectly
  • The Earned Income Tax Credit (EITC) is widely under‑claimed; most eligible households never receive it.
    • For families with children, the EITC can average around $3,000 — far more than the cost of basic tax preparation.
  • Check out AICPA’s Guide on How to Choose a CPA
  • Look for tax professionals with one of these credentials: Certified Public Accountant (CPA), Enrolled Agent (EA), or Tax Attorney