E.37.1 Deductions and Credits
Key Takeaways
Above-the-line (FOR AGI) deductions reduce AGI and are available regardless of whether you itemize—includes student loan interest, HSA contributions, and self-employment tax
2026 standard deduction: $16,100 single, $32,200 MFJ, $24,150 HOH—plus additional amounts for age 65+ and blind taxpayers
SALT deduction cap is $40,400 in 2026 ($20,200 MFS) with phase-outs beginning at $505,000 MAGI
Mortgage interest is deductible on up to $750,000 of acquisition debt ($1M for pre-December 2017 loans); home equity interest only if used to improve the home
Child Tax Credit is $2,200 per child under 17 in 2026 with income thresholds of $400,000 MFJ/$200,000 single
Deductions and Credits
Understanding the difference between deductions and credits—and how each reduces your tax burden—is fundamental to tax planning. Deductions reduce taxable income, while credits reduce tax liability dollar-for-dollar. This section covers the key deductions and credits CFP candidates need to master.
Above-the-Line vs. Below-the-Line Deductions
The tax code distinguishes between two categories of deductions based on where they appear in the tax calculation formula.
Above-the-Line Deductions (FOR AGI)
Above-the-line deductions reduce gross income to arrive at Adjusted Gross Income (AGI). These are also called "FOR AGI" deductions because they are subtracted before calculating AGI.
Key advantage: Available to ALL taxpayers, regardless of whether they itemize or take the standard deduction.
Common Above-the-Line Deductions (2026):
| Deduction | 2026 Limits/Details |
|---|---|
| Traditional IRA contributions | Up to $7,500 ($8,600 if age 50+); phase-outs apply if covered by employer plan |
| HSA contributions | $4,400 individual / $8,750 family (+$1,000 catch-up if 55+) |
| Student loan interest | Up to $2,500; phase-out $85,000-$100,000 single, $175,000-$205,000 MFJ |
| Self-employment tax (50%) | 50% of self-employment tax paid |
| Self-employed health insurance | 100% of premiums for self-employed individuals |
| Educator expenses | Up to $350 for qualified K-12 educators |
| Alimony payments | Deductible only for divorces finalized before 2019 |
| Penalty on early withdrawal of savings | Full amount deductible |
Strategic Importance: Because above-the-line deductions reduce AGI, they can help taxpayers qualify for other tax benefits that have AGI-based phase-outs.
Below-the-Line Deductions (FROM AGI)
Below-the-line deductions are subtracted from AGI to determine taxable income. Taxpayers must choose between:
- Standard deduction – A fixed amount based on filing status
- Itemized deductions – Actual qualifying expenses (Schedule A)
2026 Standard Deduction Amounts
The standard deduction was significantly increased by the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, and is indexed for inflation:
| Filing Status | 2026 Standard Deduction |
|---|---|
| Single | $16,100 |
| Married Filing Jointly | $32,200 |
| Married Filing Separately | $16,100 |
| Head of Household | $24,150 |
| Qualifying Surviving Spouse | $32,200 |
Additional Standard Deduction for Age 65+ or Blind:
| Filing Status | Additional Amount (per qualifying condition) |
|---|---|
| Single or HOH | $2,050 |
| Married (Filing Jointly or Separately) | $1,650 |
Example: A married couple both over 65 would receive: $32,200 + $1,650 + $1,650 = $35,500 standard deduction.
New Senior Bonus Deduction (2025-2028): An additional deduction of $6,000 ($12,000 for MFJ if both spouses qualify) is available for taxpayers age 65+. This phases out starting at $75,000 MAGI ($150,000 MFJ) and is completely eliminated at $175,000 ($250,000 MFJ).
Key Itemized Deductions
Taxpayers should itemize when their total itemized deductions exceed the standard deduction.
State and Local Taxes (SALT)
2026 SALT Cap (OBBBA):
- The SALT deduction cap is $40,400 ($20,200 MFS) for 2026, up from $40,000 in 2025
- Phase-out: Begins at $505,000 MAGI ($252,500 MFS)
- Full reversion: Returns to the $10,000 floor at about $606,333 MAGI (30% phase-out rate)
- Cap returns to $10,000 starting in 2030
What Qualifies as SALT:
- State and local income taxes OR sales taxes (not both)
- Real property taxes (primary and secondary residences)
- Personal property taxes (vehicles, boats)
NOT deductible: Foreign taxes (under SALT), though foreign tax credit may apply separately.
Mortgage Interest Deduction
Acquisition Debt Limits:
| Loan Origination Date | Maximum Deductible Debt |
|---|---|
| On or before December 15, 2017 | $1,000,000 ($500,000 MFS) |
| After December 15, 2017 | $750,000 ($375,000 MFS) |
Key Rules:
- Applies to primary residence plus one second home
- Home equity interest: Only deductible if proceeds used to buy, build, or substantially improve the qualifying residence
- Points on home purchase: Fully deductible in year paid
- Points on refinance: Amortized over loan term
Exam Tip: The $750,000 limit applies to TOTAL acquisition debt across all residences, not per property.
Charitable Contributions
2026 AGI Limits by Donation Type:
| Contribution Type | Public Charities | Private Foundations |
|---|---|---|
| Cash | 60% of AGI | 30% of AGI |
| Long-term capital gain property (FMV) | 30% of AGI | 20% of AGI |
| Ordinary income property (basis) | 50% of AGI | 30% of AGI |
Key Rules:
- Excess contributions carry forward for 5 years
- From 2026, itemized charitable gifts are deductible only above 0.5% of AGI (26 U.S.C. 170(b)(1)(I))
- From 2026, taxpayers who do not itemize can deduct up to $1,000 ($2,000 MFJ) of cash gifts to qualifying charities (26 U.S.C. 170(p))
- Contributions must go to qualified 501(c)(3) organizations
- Contributions over $250 require written acknowledgment
- Noncash donations over $500 require Form 8283
Qualified Charitable Distributions (QCDs): Taxpayers age 70 1/2+ can distribute up to $111,000 (2026) directly from an IRA to charity, which counts toward RMDs but is excluded from gross income.
Medical Expenses
- Deductible only to the extent they exceed 7.5% of AGI
- Includes premiums, co-pays, prescriptions, and qualifying medical procedures
- Does not include cosmetic procedures or over-the-counter medications (unless prescribed)
Casualty and Theft Losses
- Only deductible for losses attributable to federally declared disaster areas
- Subject to $100 per-incident floor AND 10% of AGI floor
- Must be reduced by insurance reimbursements
Tax Credits
Tax credits directly reduce tax liability and are more valuable than deductions of equal dollar amounts. Credits are either refundable (can result in a refund) or nonrefundable (can only reduce tax to zero).
Child Tax Credit (2026)
| Feature | 2026 Amount |
|---|---|
| Credit amount per child | $2,200 (OBBBA set $2,200 for 2025; unchanged for 2026) |
| Child age requirement | Under 17 at year end |
| Refundable portion (ACTC) | Up to $1,700 per child |
| Phase-out threshold (MFJ) | Begins at $400,000 |
| Phase-out threshold (Single/HOH) | Begins at $200,000 |
| Phase-out rate | $50 reduction per $1,000 of excess income |
Qualifying Dependent Credit: $500 nonrefundable credit for qualifying dependents who are not qualifying children (or qualifying children age 17+).
Child and Dependent Care Credit
Helps offset costs of care for children under 13 or disabled dependents while parents work.
2026 Limits:
| Feature | Amount |
|---|---|
| Maximum eligible expenses (1 qualifying person) | $3,000 |
| Maximum eligible expenses (2+ qualifying persons) | $6,000 |
| Credit percentage | 20%-50% based on income (OBBBA, from 2026) |
| Maximum credit (2+ dependents, lowest income) | $3,000 |
Key Rules:
- Both spouses must have earned income (or be full-time students)
- Expenses limited to lesser of actual costs or lower-earning spouse's income
- Must reduce eligible expenses by dependent care FSA contributions
- Credit is nonrefundable
Education Tax Credits
American Opportunity Tax Credit (AOTC):
| Feature | 2026 Amount |
|---|---|
| Maximum credit per student | $2,500 |
| Calculation | 100% of first $2,000 + 25% of next $2,000 |
| Refundable portion | 40% (up to $1,000) |
| Years available | First 4 years of higher education only |
| MAGI phase-out (Single) | $80,000 - $90,000 |
| MAGI phase-out (MFJ) | $160,000 - $180,000 |
Lifetime Learning Credit (LLC):
| Feature | 2026 Amount |
|---|---|
| Maximum credit per return | $2,000 |
| Calculation | 20% of first $10,000 in expenses |
| Refundable | No |
| Years available | Unlimited (graduate school eligible) |
| MAGI phase-out (Single) | $80,000 - $90,000 |
| MAGI phase-out (MFJ) | $160,000 - $180,000 |
Key Distinction: AOTC is per student; LLC is per tax return. Cannot claim both for the same student in the same year.
Refundable vs. Nonrefundable Credits
| Credit Type | Can Reduce Tax Below Zero? | Examples |
|---|---|---|
| Refundable | Yes—excess creates refund | Earned Income Credit, ACTC portion, 40% of AOTC |
| Nonrefundable | No—reduces tax to zero only | Child/Dependent Care, LLC, most energy credits |
Strategic Application: Refundable credits are more valuable for lower-income taxpayers because they provide benefits even when tax liability is minimal.
Deductions vs. Credits: Comparative Value
| Item | Type | Value to 22% Bracket Taxpayer |
|---|---|---|
| $1,000 deduction | Reduces taxable income | $220 tax savings |
| $1,000 credit | Reduces tax directly | $1,000 tax savings |
Key Insight: A $1,000 credit is always worth more than a $1,000 deduction, regardless of tax bracket. This is why tax planning often focuses on maximizing available credits first.
A single taxpayer age 68 (not blind) has MAGI of $60,000. What is the total of her 2026 standard deduction and the senior deduction?
$16,100
$18,150
$22,150
$24,150
A married couple filing jointly has AGI of $450,000 and paid $50,000 in state income taxes and property taxes. Under the 2026 SALT rules, how much can they deduct?
$10,000 (original TCJA cap)
$40,400 (full 2026 cap amount)
$25,000 (partial phase-out applies)
$50,000 (no cap for high-income taxpayers)
A taxpayer claims the American Opportunity Tax Credit for her daughter who is a sophomore in college. The taxpayer paid $5,000 in qualified education expenses. What is the maximum credit amount, and is any portion refundable?
$2,000 credit; fully nonrefundable
$2,500 credit; 40% ($1,000) is refundable
$2,500 credit; fully refundable
$1,250 credit; 40% ($500) is refundable
Sections you finish are checked off in the contents.