02.05.2025 By Amy Miller, AFC®

Maximize Your Tax Refund: Deductions and Credits You Should Know

Tax season is the perfect opportunity to give your finances a boost. Understanding key tax deductions and credits allows you to maximize your refund and set yourself up for a more secure financial future.

 

Here’s a guide to some essential tax breaks you should be aware of—and how to make the most of your refund once it arrives.

Tax Credit vs. Tax Deduction: What’s the Difference?

Understanding the difference between a tax credit and a deduction is essential for maximizing your tax savings. A tax credit directly reduces the amount of tax you owe dollar-for-dollar. For example, if you owe $2,000 in taxes and qualify for a $1,000 tax credit, your tax liability is reduced to $1,000. On the other hand, a tax deduction lowers your taxable income, which in turn reduces the amount of tax you owe. For instance, if you have $5,000 in deductions and your taxable income is $50,000, the deductions lower your taxable income to $45,000. While both tax credits and deductions can save you money, credits typically provide a more significant benefit because they reduce the tax owed directly, whereas deductions lower the amount of income subject to tax.

Tax Deductions and Credits to Know:

  1. Earned Income Tax Credit (EITC)
    The EITC is a significant credit for low- to moderate-income workers. Depending on your income and family size, it can substantially reduce your tax bill or even result in a refund.
  2. Child and Dependent Care Credit
    If you paid for childcare or adult dependent care, you might qualify for this credit, which covers a percentage of your expenses.
  3. American Opportunity Credit
    This credit is aimed at helping students or their parents offset the costs of higher education. It covers tuition, fees, and course materials for the first four years of post-secondary education.
  4. Lifetime Learning Credit
    Unlike the American Opportunity Credit, the Lifetime Learning Credit can be used for tuition and related expenses for undergraduate, graduate, and professional degree courses.
  5. Retirement Savings Contributions Credit (Saver’s Credit)
    If you contribute to a retirement plan like an IRA or 401(k), you may qualify for a credit that helps reduce your tax bill.
  6. Student Loan Interest Deduction
    If you’ve been paying interest on student loans, you may be able to deduct up to $2,500, even if you don’t itemize your deductions.
  7. Medical and Dental Expenses
    You can deduct unreimbursed medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI). This includes doctor visits, prescriptions, and certain medical equipment.
  8. State and Local Taxes (SALT)
    You can deduct up to $10,000 ($5,000 if married filing separately) for state and local income, sales, and property taxes.
  9. Mortgage Interest Deduction
    Homeowners can deduct interest paid on mortgages up to $750,000 ($375,000 if married filing separately). This deduction can significantly reduce your taxable income if you itemize.
  10. Charitable Contributions
    If you’ve made donations to qualified charitable organizations, you may be able to deduct these contributions.

For a full list of credits and deductions, visit the IRS's Credits & Deductions page.

Make the Most of Your Refund

Once you've maximized your refund, it's time to think about how you can use it to improve your financial health. One of the best steps you can take is to start or grow your emergency fund. Having a financial cushion can help you handle unexpected expenses without going into debt.

Open an Account and Save
Consider opening a savings account and depositing a portion of your refund as an emergency fund. You can find safe and affordable accounts through programs like Bank On, which partners with financial institutions to offer low-fee, accessible banking options.

Set Up Automatic Savings
Once your account is open, set up automatic transfers from your checking to your savings account or direct deposit through your employer. Even small, consistent contributions can add up over time, providing you with a stronger financial safety net.

Start Saving Today!

Your tax refund is a valuable resource that can set the foundation for a more secure future. By saving a portion of it, you’re taking a proactive step toward financial stability.

Open an account today, start your emergency fund, and commit to automatic savings.

Visit America Saves and take the pledge. Choose your savings goal and we’ll be your partner along the way! While you’re there, check out our resource center for more tips, tools, and information to help you achieve your financial dreams and aspirations.

Make this tax season the start of your journey to financial wellness.

Need more tips on how to maximize your refund? Check out our approach to handling extra money using the 30/40/30 Rule and make a plan to save for your Past, Present & Future.  

Disclaimer:

The information provided in this blog is for general informational purposes only and should not be considered as financial or tax advice. Tax laws and regulations are complex and subject to change. For advice specific to your individual circumstances, we recommend consulting with a qualified tax professional or financial advisor. America Saves does not endorse or guarantee the accuracy or applicability of any information presented in this blog for your particular situation.

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