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Do you ever feel like you're leaving money on the table?

Well, when it comes to paying your taxes, you might be.

Think about it: Every year, millions of people miss out on opportunities to reduce their tax bills simply because they don't know about the deductions and credits they qualify for. In fact, according to the IRS, a staggering 25% of taxpayers who are eligible for the Earned Income Tax Credit fail to claim it. That's a quarter of eligible people leaving hundreds — sometimes thousands — of dollars of free money behind!

But here's the good news...

Understanding how tax deductions and credits work doesn't have to be complicated. (And no, you don't need to be a tax expert to make the most of what's available.)

In this guide, we're going to walk through the essentials — without the jargon or IRS-speak. Just clear, practical advice to help you keep more of your hard-earned money. Ready to dive in?

What's the Difference Between Tax Deductions and Credits?

You've probably heard people throw around terms like "deductions" and "credits" when tax season rolls around, but what do those words really mean? And how do they actually affect your tax bill?

Let's make things simple. Every April, the IRS looks at how much money you (and potentially a spouse) earned throughout the year and uses that to determine how much money you owe in taxes.

However, due to various legislative policies and incentives, we can actually shave down our tax bill before we pay it; we do this by claiming various deductions andcredits that we qualified for over the course of the year.

Deductionslower your "taxable income" from the year, while credits directly lower your tax bill. Below, I'll show you how each one works to keep more of your money in your pocket and how understanding the difference can help you make the most of tax season.

How Tax Deductions Work in Practice

Let's break down tax deductions first and see how they actually save you money.

The amount of money you owe in federal taxes is based directly on the amount of income you earn. But you can lower that tax bill significantly by applying deductions, which lets you subtract certain amounts from your total income to make the number lower.

This new, lower number is what the IRS uses to calculate how much tax you owe. So the more deductions you take, the more you'll lower your "taxable income," the more you'll lower your ultimate tax bill.

Because nothing is ever simple when it comes to taxes, there are a few different ways you can apply deductions to your income. The most popular choice is to take the standard deduction, which subtracts a pre-set dollar amount from your total income. The second way to apply deductions is toitemize your deductions, which involves going through a specific list of possible deductions and writing out every one you qualify for.

You can choose to take the standard deduction or itemize deductions, but you cannot do both. In most cases, it's best to choose whichever method lowers your income the most (although there may be certain scenarios where that's not the case). If your taxes are complicated, it's always best to work with a professional tax advisor.

But we're not done! There's another group of deductions — called "above the line" deductions — that everyone can take advantage of, regardless of whether you choose to itemize or take the standard deduction. These special deductions include contributions to a traditional IRA, student loan interest, and certain health savings account (HSA) contributions.

Takeaway:Think of tax deductions as a way to shrink the amount of income the IRS can tax. Picture your gross income — the total amount you earned throughout the year. Deductions chip away at that number, making your taxable income smaller. The smaller your taxable income, the less tax you pay. Easy, right?

How Tax Credits Work in Practice

Now, let's shine a spotlight on tax credits — arguably the real MVPs of tax season.

Picture this: You've crunched the numbers, found all your available deductions and lowered your taxable income as much as possible. Even so, you find out you still owe money to the IRS. Ouch.

Enter tax credits. Unlike deductions (which reduce your taxable income), credits directly lower your tax bill dollar for dollar. If you qualify for a $2,000 credit, that means you get to subtract $2,000 from your tax bill.

And there's more. Credits fall into two categories — non-refundable and refundable.

Non-Refundable Credits can lower your tax bill to zero, but any leftover credit doesn't result in a refund. So if you owe $1,000 in taxes and have a non-refundable credit worth $1,500, you bring your bill down to zero but don't pocket that extra $500.

Refundable Creditscan actually put money in your pocket. If your tax bill drops below zero because of a refundable credit, you'll get the difference as a refund. Take the Earned Income Tax Credit, for instance. If your tax bill is $500 and the credit is worth $1,000, not only does the credit wipe out your bill, but you also get $500 back.

Takeaway:Tax credits are powerful because they reduce your tax bill directly, dollar for dollar — potentially all the way down to $0. And if they're refundable, they can even give you extra cash back.

Stacking Deductions and Credits for Maximum Savings

Now that we've explored tax deductions and credits individually, let's talk about how to combine them to maximize your savings and make tax season work for you.

Imagine you're single and making $100,000 a year. If the IRS used that number to calculate how much you owe in federal taxes, your tax bill would be $17,053.

But because you worked hard for that money — and you're a savvy taxpayer — you know you have steps you can take to keep as much of it as you're entitled to.

Step 1: Use Deductions to Lower Your Taxable Income

First up, tax deductions. The lower this number, the less tax you have to pay overall.

Deductions are especially valuable if you have a lot of above-the-line options, like contributing to a traditional IRA or deducting student loan interest, or if you itemize your deductions for things like mortgage interest or significant medical expenses.

When you look through the available deductions, you realize you qualify for about $15,000 in above-the-line tax deductions from student loan interest and retirement contributions. This amount gets subtracted from your total income, which reduces your taxable income.

Next, you look at the list of possible "itemized deductions" you qualify for; they add up to a total of $7,000. The standard deduction, on the other hand, is worth $14,600 for single filers. You choose to take the standard deduction, and subtract that number from your income as well.

$100,000 – $15,000 above-the-line deductions – $14,600 standard deduction = $70,400

Your new "taxable income" is now $70,400. This new, lower number is what the IRS uses to calculate how much tax you owe, which would be $10,541 for 2024. That's nearly $6,500 shaved off your tax bill just by claiming deductions!

But we're not done yet...

Step 2: Apply Credits to Slash Your Tax Bill

Once you've used deductions to lower your taxable income, it's time for the heavy hitters — tax credits. Remember, credits reduce your tax bill dollar for dollar, so they have a direct and powerful impact.

Let's go back to our example. You used deductions to reduce your taxable income and lowered your tax bill from $17,053 to $10,541.

Fortunately, your employer has been withholding money for your federal taxes from each paycheck. In total, your federal tax withholding was $6,000, but that's not enough to cover your entire tax bill. You still owe $4,541 in federal taxes.

You look through a list of tax credits and realize that the electric vehicle you purchased this year qualifies for a federal EV tax credit worth $7,500. What happens? That credit slices $7,500 right off your tax bill.

Unfortunately, it happens to be a non-refundable credit, so while it brings your tax bill down to $0, you don't receive the remaining $2,959 as a refund. However, if you manage to find an additional refundable credit that you qualify for... you'll be walking away from tax season with extra cash in your pocket.

The One-Two Punch for Tax Savings

As you can see, combining deductions and credits is the ultimate tax-saving strategy. Deductions soften the blow by lowering the income you're taxed on, while credits step in to reduce your final bill. By using both, you maximize your tax savings and ensure you're not leaving any money on the table.

This strategy becomes even more important if you're in a higher tax bracket or have multiple tax credits available. In some cases, stacking these can be the difference between a large tax bill and getting a refund. And even if you don't have a complicated tax situation, being strategic can still put extra money back in your pocket — or at least keep more of what you've earned.

Tax deductions and credits (and who qualifies for them) can change from one year to the next, so always check to see what you qualify for, and don't leave money on the table!

Here's a list of common tax deductions and credits to keep on your radar:

Above-the-Line Deductions

Retirement accounts like a traditional IRA, 401(k), 43(b), 457 plans, as well as a few less common retirement accounts

Health Savings Accounts (HSA) and Archer Medical Savings Accounts (MSA)

Student loan interest

Tuition and certain other educational expenses for certain qualified institutions

Most business expenses related to the operation of a sole proprietorship

Alimony from divorces before 2019 (under certain terms)

Early withdrawal penalties from a CD or savings bond

Qualified educator expenses for people who teach grades K-12 who work at least 900 hours during the year

Certain military moving expenses

Itemizable Deductions

State and local income or sales taxes

Real estate and personal property taxes

Home mortgage interest (limits apply)

Qualified charitable/non-profit contributions (including non-monetary donations and gifts)

Unreimbursed medical or dental expenses that exceed 7.5% of adjusted gross income

Personal casualty and theft losses from a federally declared disaster

Gambling losses

Investment interest expenses

Tax Credits

Earned Income Tax Credit (EITC)

Child Tax Credit (CTC)

Child and Dependent Care Credit

American Opportunity Tax Credit (AOTC)

Lifetime Learning Credit (LLC)

Saver's Credit

Residential Energy Efficient Property Credit

Electric Vehicle Tax Credit

Adoption Credit

Foreign Tax Credit

Take the Stress Out of Tax Season

Taxes don't have to be a nightmare. Seriously. With a little planning and a better understanding of how deductions and credits work, you can feel more in control — and maybe even walk away with a bit of extra cash.

Remember, understanding the basics can make a huge difference. Review your income, think carefully about your deductions, and take advantage of every credit you're eligible for. It's your money, after all, and you deserve to keep as much of it as possible.

If you feel overwhelmed, start small. Organize your tax documents, look into a few key deductions, and consider getting help from tax software or a professional. And hey, it's perfectly normal to feel a little anxious about getting it right — most of us do.

The key? Take it one step at a time. Tax season might never be your favorite time of year, but at least you'll know you're making smart moves to save money.