The standard deduction
You generally have two choices when filing your tax return:
- Claim the standard deduction (a flat dollar amount), or
- Itemize your deductions (add up deductible expenses like medical costs, home mortgage interest, state and local taxes, and charitable contributions).
For 2020, the standard deduction is $12,400 for single filers and $24,800 for married couples.2 Since your itemized deductions replace your standard deduction, it only makes sense to itemize if your itemized deductions are greater than your standard deduction will be.
Child tax credit
Parents may benefit from the child tax credit.3 This tax credit is worth up to $2,000 for each qualifying child under the age of 17. Married couples filing jointly can claim the full $2,000 credit per child if their adjusted gross income is under $400,000, while single filers can claim the full amount if their adjusted gross income is under $200,000.
Up to $1,400 of the child tax credit refundable. This is a great feature for those whose total tax burden is less than the value of the tax credit. In those cases, the tax credit is first used to offset the taxes you owe for the year. The IRS will then refund you the remaining amount, up to $1,400.
There is also a separate credit for dependents that aren't kids under age 17. This credit is worth up to $500 for dependents, such as elderly disabled parents or children who are 17+.
If you have a child headed to college or are pursuing higher education yourself, check out these tax credits available for education expenses.
The American Opportunity Tax Credit4 (AOTC) provides a tax credit for tuition, fees, and course materials required for college attendance. It's worth 100% of the first $2,000 of qualified education expenses and 25% of the next $2,000 of those expenses, for a maximum of $2,500 per eligible student. Up to $1,000 of the credit is refundable, meaning that if your total tax liability is less than the value of the credit, you can get up to $1,000 back from the IRS. The AOTC is only available for the first four years of undergraduate education, and the student has to be enrolled at least half-time.
The Lifetime Learning Credit5 (LLC) is worth 20% of the first $10,000 of qualified education expense, or a maximum of $2,000 per return. There is no limit to the number of years you can claim the LLC — it can even be used for professional degree courses. However, no portion of the LLC is refundable.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) can deliver significant tax savings for low- to moderate-income taxpayers. For 2020, the maximum credit ranges from $538 to $6,660, depending on your filing status and how many children you have.6
These are just a few of the tax deductions and credits available for 2020. If you believe you might qualify for one or more of these tax breaks, take the time to research the rules for claiming them or talk to a tax professional. If you are eligible, you could drastically slash your tax liability and even qualify for a hefty tax refund.