Key Tax Deductions and Credits for Young Adults

Filing taxes requires understanding the difference between a tax deduction and a tax credit. A tax deduction is an expense that the Internal Revenue Service (IRS) allows you to subtract from your total income, which lowers the amount of your income subject to tax. This can translate into significant tax savings each year.

A tax credit provides a more direct benefit by reducing your final tax bill on a dollar-for-dollar basis. If you owe $2,000 in taxes and qualify for a $1,000 tax credit, your tax liability is cut to $1,000. Some credits are even “refundable,” meaning if the credit is larger than your tax bill, the IRS will send you the difference as a refund.

Foundational Tax Concepts for Young Adults

When filing, taxpayers can choose between taking the standard deduction or itemizing deductions. The standard deduction is a fixed dollar amount you can subtract from your income without documenting specific expenses. For the 2025 tax year, the standard deduction for a single individual is $14,600.

Itemizing involves adding up all individual, eligible expenses on Schedule A of Form 1040. You should only itemize if the total of your specific deductions is greater than the standard deduction. For most young adults who do not own a home or have significant deductible expenses, the standard deduction is often the simpler and more advantageous option.

A young adult’s ability to claim certain tax benefits is also influenced by whether they can be claimed as a dependent on a parent’s tax return. If you are claimed as a dependent, you cannot claim dependents of your own and are ineligible for certain education credits. Additionally, your standard deduction may be limited.

Education-Related Tax Benefits

A common deduction for recent graduates is for student loan interest. This allows you to subtract the amount you paid in interest on a qualified student loan, up to a maximum of $2,500 per year. This is an “above-the-line” deduction that reduces your adjusted gross income (AGI), and you do not need to itemize to claim it. Your lender will send you Form 1098-E if you paid $600 or more in interest.

Eligibility for the student loan interest deduction is subject to income limitations. For the 2025 tax year, the deduction begins to phase out for single filers with a modified adjusted gross income (MAGI) between $80,000 and $95,000. If your MAGI exceeds $95,000, you cannot claim the deduction. You must be legally obligated to pay the loan to qualify.

The American Opportunity Tax Credit (AOTC) provides a benefit for students in their first four years of higher education. The AOTC is a credit worth up to $2,500 per eligible student, calculated as 100% of the first $2,000 of qualified education expenses and 25% of the next $2,000. Up to 40% of the credit ($1,000) is refundable, meaning you can receive it back even if you owe no tax.

To claim the AOTC, the student must be pursuing a degree, be enrolled at least half-time, and not have a felony drug conviction. For those whose educational pursuits extend beyond the first four years or who are taking courses to acquire job skills, the Lifetime Learning Credit (LLC) is another option. The LLC is a nonrefundable credit worth up to $2,000 per tax return, calculated as 20% of the first $10,000 in qualified education expenses.

Unlike the AOTC, there is no limit on the number of years you can claim the LLC, and the student does not need to be pursuing a degree. Both the AOTC and LLC are subject to the same income limits, beginning to phase out for single filers with a MAGI between $80,000 and $90,000 for 2025. To claim either credit, you will use Form 1098-T from your school to complete Form 8863, which is filed with your tax return.

Work and Retirement Savings Deductions

Contributing to a Traditional Individual Retirement Arrangement (IRA) is a way to save for the future while reducing your current taxable income. For 2025, you can contribute up to $7,000 to an IRA, or $8,000 if you are age 50 or older. The amount you contribute is fully deductible if you are not covered by a retirement plan at work, such as a 401(k).

If you have a workplace retirement plan, your ability to deduct Traditional IRA contributions depends on your income. For 2025, the deduction for single filers covered by a workplace plan is phased out for those with a MAGI between $77,000 and $87,000. This deduction is claimed on Schedule 1 of Form 1040.

A Health Savings Account (HSA) offers a triple tax advantage for those enrolled in a High-Deductible Health Plan (HDHP). Contributions are tax-deductible, the funds grow tax-free, and withdrawals for qualified medical expenses are tax-free. This makes it a powerful tool for managing healthcare costs and saving for retirement.

To be eligible for an HSA, you must be covered under an HDHP and cannot be claimed as a dependent. For 2025, the annual contribution limit for an individual with self-only HDHP coverage is $4,300. Like the Traditional IRA deduction, HSA contributions are an “above-the-line” deduction you can claim without itemizing.

If you are an independent contractor or freelancer, you can deduct ordinary and necessary business expenses on Schedule C of Form 1040. These deductions reduce your self-employment income, which is subject to both income and self-employment taxes. Meticulous record-keeping of all income and expenses is necessary to substantiate these deductions. Common deductions include:

• The business use of your car, for which you can deduct actual expenses or take the standard mileage rate (70 cents per mile for 2025).
• The home office deduction, which allows a deduction of $5 per square foot of the home used for business, up to 300 square feet.
• Supplies and software subscriptions.
• Business-related travel.
• A portion of your self-employment tax.

Other Common Itemized Deductions

While most young adults use the standard deduction, some situations may make itemizing a better choice. This is only the case if your total itemized deductions on Schedule A exceed the standard deduction. One of the most common itemized deductions is for charitable contributions made to qualified organizations. You can deduct cash contributions and the fair market value of donated property.

Another itemized deduction is for state and local taxes (SALT), which includes income, sales, real estate, and personal property taxes. Taxpayers can only deduct a maximum of $10,000 per household per year for all state and local taxes combined. This limitation makes it less likely for many taxpayers to have enough itemized deductions to surpass the standard deduction.

A deduction for medical expenses is also available but can be difficult to claim. Taxpayers can only deduct the amount of their qualified medical expenses that exceeds 7.5% of their AGI. For example, if your AGI is $50,000, you would need more than $3,750 in unreimbursed medical expenses before you could deduct any of them.

Most tax preparation software simplifies the process by asking questions and populating the correct forms based on your answers. Whether you file yourself or with a professional, keep all supporting documentation, such as receipts and IRS forms like 1098-E and 1098-T, for at least three years in case the IRS has questions about your return.