Deductions and Credits

Every individual return follows the same path, and almost every tax-saving move works by changing one step of it. Knowing which step a deduction or credit touches tells you what it’s actually worth.

The path

1. Gross income: wages, interest, dividends, business and farm profit, and so on.
2. Minus adjustments (“above the line”): traditional IRA and HSA contributions, half of self-employment tax, student loan interest, and a few others. The result is adjusted gross income (AGI). Many phase-outs, and Wisconsin’s return, start from AGI ¹.
3. Minus deductions: the standard deduction or your itemized deductions, whichever is larger. The result is taxable income.
4. Apply the brackets (previous lesson) to get the tax.
5. Minus credits: subtracted from the tax itself.
6. Compare with what you’ve already paid, both withholding from paychecks and estimated payments, to get your refund or balance due.

Standard or itemized

The standard deduction for 2025 is $15,750 single, $31,500 married filing jointly, and $23,625 head of household; for 2026 it’s $16,100, $32,200, and $24,150 ². Itemized deductions (mortgage interest, state and local taxes up to a cap, charitable gifts, large medical bills) only help if they add up to more than that. Most households take the standard deduction.

One planning trick follows from it: if your itemized deductions are close to the line, bunch them, for example by making two years of charitable gifts in one year, itemizing that year, and taking the standard deduction the next.

Deductions versus credits

• A deduction lowers taxable income, so it saves the deduction times your marginal rate. In the 22% bracket, a $1,000 deduction saves $220.
• A credit comes straight off the tax. A $1,000 credit saves $1,000, whatever your bracket.
• Some credits are refundable: if they exceed your tax, you get the difference as a refund. The adoption credit, for instance, is now partly refundable, up to $5,000 ³. Non-refundable credits can only bring the tax down to zero.

That’s why a credit is generally worth several times a deduction of the same size.

The new federal deductions

The 2025 federal tax law (the One Big Beautiful Bill Act, which the IRS now calls the Working Families Tax Cuts ³) added four temporary deductions, claimed on a new Schedule 1A for tax years 2025 through 2028, whether or not you itemize ¹:

Tips and overtime are still subject to Social Security and Medicare tax, and employers still withhold income tax on them; the deduction comes on the return ¹. Wisconsin has not adopted any of the four, so those amounts stay taxable on the state return ¹.

Try it

On last year’s 1040, label each line by step: income, adjustments, AGI, deduction, taxable income, tax, credits, payments. Then add up what you could have itemized and see how far it is from the standard deduction. That tells you whether bunching or a bigger retirement contribution (an adjustment) would move the number more.