Learn more about tax benefits like deductions and credits and how they impact your taxes. Some tax benefits reduce your taxable income while others directly reduce the taxes you owe. Find out how you can claim these tax benefits to lower your tax bill or increase your refund.
NEW TAX LAW CHANGES
The One Big Beautiful Bill that passed includes permanently extending tax cuts from the Tax Cuts and Jobs Act, including increasing the cap on the amount of state and local or sales tax and property tax (SALT) that you can deduct, makes cuts to energy credits passed under the Inflation Reduction Act, makes changes to taxes on tips and overtime for certain workers, reforms Medicaid, increases the Debt ceiling, and reforms Pell Grants and student loans. Updates to this article are in process. Check our One Big Beautiful Bill article for more information.
Reducing your taxes
The term “tax benefit” generally refers to any tax law that provides you with an opportunity to reduce your tax bill when you satisfy certain eligibility requirements. A tax benefit comes in different forms, such as a deduction, exclusion or credit. The amount of tax you can save also depends on the type of tax benefit you claim because they each offer a different form of savings.
Saving tax with deductions
The most common type of tax benefit comes in the form of a tax deduction. When you claim a tax deduction, it reduces the amount of your income that is subject to tax. The amount of the deduction you are eligible to claim is precisely the amount of the reduction to your taxable income. Frequently claimed deductions cover the cost of tuition and fees, medical expenses, charitable contributions and state income taxes. Another benefit to a deduction is that it reduces income subject to the highest tax brackets first.
Excluding income from income tax
An exclusion from tax provides the ultimate tax benefit because the income never ends up on your tax return, and if it does, it generally comes off in another section of your return. Exclusions essentially classify certain types of income as tax-free.
One of the largest exclusions available to taxpayers is the foreign earned income exclusion. In 2025 for example, the law allows you to exclude up to $126,500 of income that you earn outside the United States provided you remain in a foreign country for most of the tax year. Unlike deductions, exclusions are not subject to limitations or reductions; you either meet the requirements to exclude the income, or you don’t.
Claiming tax credits
A tax credit generally has more tax-savings potential than a deduction as it provides a dollar-for-dollar reduction in the amount of income tax you owe rather than merely reducing the amount of income subject to tax. Tax credits exist for an array of expenses you might incur during the year from college tuition to the installation of energy-efficient equipment in the home.
When claiming any tax credit, the IRS generally requires you to prepare a separate credit-specific form to document and calculate the amount you are eligible for, regardless of the amount you are claiming. In contrast, most of the available tax deductions do not require you to fill out additional forms.
Reducing income tax with capital losses
Losing money is never a pleasant experience. However, the one advantage to a loss is that it may provide you with a tax-reducing benefit. Frequently, taxpayers sell their stocks during the year for less than they paid for them. You can use this capital loss to offset other capital gains you have during the year.
If your losses exceed gains, you can then use up to $3,000 of the loss each year as a normal tax deduction until you have deducted the full loss. To claim this loss, you must calculate all of your capital gains and losses on the Schedule D attachment to your personal income tax return. If you intend on using a part of the loss in future tax years, be sure to keep a copy of this Schedule D in a safe place.
A tax deduction lowers your overall taxable income, meaning your net cash savings depend on your marginal tax bracket. An exclusion keeps specific income off your tax return completely. A tax credit directly reduces your final tax bill on a dollar-for-dollar basis, offering the highest potential savings regardless of your tax bracket.
When filing taxes, you can choose between claiming the flat standard deduction or itemizing specific qualified expenses (like mortgage interest, high medical bills, or state/local taxes) on Schedule A. You pick whichever option gives you the larger reduction to your taxable income. Under recent tax law changes, non-itemizers taking the standard deduction can also claim select above-the-line benefits, such as a limited charitable contribution deduction.
Both types reduce your income tax liability dollar-for-dollar. A nonrefundable credit can reduce what you owe down to $0, but any excess credit value above your tax bill is lost. A refundable credit reduces your tax bill to $0, and if there is remaining credit value, the IRS sends the leftover amount directly to you as a tax refund.
If you sell assets like stocks for less than your purchase price, you generate a capital loss. First, you use these losses to offset any capital gains realized during the year. If your total losses exceed your total gains, you can use up to $3,000 of the net loss per year to offset regular taxable income, rolling over any remaining unused losses to future tax years via Schedule D.
Recent updates under the One Big Beautiful Bill Act (OBBBA) permanently extended the expanded standard deduction and lower TCJA income tax brackets. Key adjustments include: State and Local Tax (SALT): The itemized deduction cap was temporarily increased from $10,000 to $40,000 for qualifying taxpayers.
Manoj Sharma is a Senior Writer on the banking team at Tax Assistant. He provides information on budgeting, bank accounts, the banking industry, and other related topics. Using original data and methodologies, he helps you identify the best financial institutions, accounts, and products tailored to your needs. Manoj holds a degree in Journalism and Political Science from Syracuse University.
