#201: Tax Deductions 101

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