SEE Part 1 deductions and credits explained
Deductions and Credits is worth 17 of the 85 scored questions on SEE Part 1, 20% of the paper, tied with Income and Assets as the largest domain. It covers the choice between the standard deduction and itemizing, each Schedule A category and its limits, the qualified business income deduction, and the individual credits: who qualifies, what they are worth, and whether they are refundable. Paid preparer due diligence for the earned income credit is also listed explicitly.
Tax year 2025 matters a lot here. The 2025 legislation changed the standard deduction, the state and local tax limit and the child tax credit for 2025, and added several new deductions. Study from 2025 IRS material only.
Standard deduction or itemize
The taxpayer takes whichever is larger. For 2025 the standard deduction is:
| Filing status | 2025 standard deduction |
|---|---|
| Single or married filing separately | $15,750 |
| Married filing jointly or qualifying surviving spouse | $31,500 |
| Head of household | $23,625 |
Additional amounts apply for taxpayers who are 65 or older or blind. If one spouse itemizes on a separate return, the other must itemize too (their standard deduction is zero).
New for 2025, available whether or not the taxpayer itemizes and subject to income phase-outs: a deduction for qualified tips (up to $25,000), for qualified overtime pay (up to $12,500, or $25,000 on a joint return), for qualified passenger vehicle loan interest on a vehicle bought in 2025 for personal use (up to $10,000), and an enhanced deduction for seniors born before January 2, 1961 (up to $6,000, or $12,000 if both spouses qualify).
Itemized deductions (Schedule A)
| Category | The rule to know |
|---|---|
| Medical and dental | Only the amount above 7.5% of AGI; includes long-term care within limits; no deduction for reimbursed costs |
| Taxes | State and local income or sales tax, real estate and personal property taxes, together limited to $40,000 for 2025 ($20,000 if married filing separately), with the limit reduced at higher incomes |
| Interest | Home mortgage interest on acquisition debt (used to buy, build or substantially improve the home); points; investment interest up to net investment income, with tracing rules |
| Charitable | Cash and property to qualified organisations, with AGI percentage limits, carryovers and record-keeping requirements that rise with the amount |
| Casualty and theft | Personal losses generally only if caused by a federally declared disaster |
| Form 1040-NR | Nonresident aliens have a narrower list of itemized deductions |
Interest on a home equity loan is deductible only if the money was used to buy, build or substantially improve the home that secures it. Using it for a car or to pay off credit cards makes the interest non-deductible.
Qualified business income (QBI) deduction
Generally up to 20% of qualified business income from sole proprietorships and pass-through entities, taken whether or not the taxpayer itemizes. At higher incomes, limits based on W-2 wages and property apply, and specified service businesses are phased out. A negative QBI amount carries forward. Part 1 tests it from the individual’s side; Part 2 goes deeper.
Credits
| Credit | Key test | Refundable? |
|---|---|---|
| Child tax credit | Qualifying child under 17 at year-end with an SSN; $2,200 per child for 2025 | Partly: up to $1,700 per child as the additional child tax credit |
| Credit for other dependents | Dependents who do not qualify for the child tax credit | No |
| Child and dependent care | Care for a child under 13 or a disabled dependent or spouse so the taxpayer can work | No |
| American opportunity | First four years of higher education, at least half-time, toward a degree | Partly (40%) |
| Lifetime learning | Any post-secondary course, no limit on years | No |
| Earned income credit | Earned income, investment income limit, age and residency rules | Yes |
| Adoption | Qualified expenses, carryforward of unused credit, special needs rules | Partly: for 2025, up to $5,000 per child is refundable |
| Foreign tax credit | Foreign income taxes; alternatively deductible as an itemized deduction | No |
| Premium tax credit | Marketplace coverage; advance payments reconciled on Form 8962 | Yes |
| Retirement savings contribution | Contributions by lower-income savers | No |
A taxpayer cannot claim both education credits for the same student in the same year.
Earned income credit due diligence. A paid preparer claiming the EIC, child tax credit, American opportunity credit or head of household status must meet due diligence requirements: complete Form 8867, apply the knowledge requirement (make reasonable enquiries when information seems incorrect, inconsistent or incomplete, and document them), and keep records. Failing to do this results in a penalty for each failure.
Sample questions
Question 1. Grace has AGI of $80,000 and itemizes deductions for 2025. She paid $9,000 of unreimbursed medical and dental expenses for herself. How much can she deduct as a medical expense?
- A. $9,000
- B. $6,000
- C. $0
- D. $3,000
Show answer
Answer: D
Medical and dental expenses are deductible only to the extent they exceed 7.5% of AGI. 7.5% of $80,000 is $6,000, so $9,000 minus $6,000 leaves $3,000 deductible on Schedule A. The full $9,000 ignores the floor, $6,000 is the floor itself, and nothing is wrong with her claiming the deduction because she itemizes.
Question 2. Which statement about the American opportunity credit and the lifetime learning credit is correct?
- A. Part of the American opportunity credit can be refundable, but the lifetime learning credit is nonrefundable
- B. The lifetime learning credit can be claimed for only four tax years per student
- C. The American opportunity credit is available for a single course not taken toward a degree
- D. Both credits can be claimed for the same student in the same year
Show answer
Answer: A
Up to 40% of the American opportunity credit can be refundable, while the lifetime learning credit is nonrefundable. The American opportunity credit is limited to the first four years of post-secondary education and requires at least half-time enrollment in a degree program. The lifetime learning credit has no limit on years, and the two credits cannot both be claimed for the same student in the same year.
Question 3. A paid preparer is completing a return claiming the earned income credit. The 20-year-old client says she has two qualifying children aged 10 and 11. Which action does the knowledge requirement call for?
- A. Accept the client’s statement, since the preparer is not an auditor
- B. Ask reasonable follow-up questions about the children’s relationship and residency, and document the answers
- C. Refuse to prepare the return
- D. File the return and attach a note asking the IRS to verify the children
Show answer
Answer: B
The due diligence knowledge requirement means a preparer may not ignore information that appears incorrect, inconsistent or incomplete. A 20-year-old with children of 10 and 11 is inconsistent on its face, so the preparer must make reasonable enquiries, such as the children’s relationship to the client, and document the questions and answers. Accepting the claim without enquiry, refusing outright or asking the IRS to decide are not what the rule requires.
What to practise
Build a one-page credit table from memory: the qualifying test, whether it is refundable, and the form. Then write out the Schedule A categories with each floor or limit. If you can reproduce both, you have most of this domain covered. Next, taxation.