Deductions lower the amount of income subject to tax. Credits are more valuable because they cut your bottom-line tax bill. So if your tax bill will be $20,000, a $10,000 credit would cut that in half.
Interest deduction This was popular among tax avoiders, with the IRS reporting that nearly 60 percent of their returns had claimed it.
You can deduct the interest paid on mortgages of up to $1 million taken out to buy a primary residence.
Charitable donations Making a big donation can cut taxable income substantially — although deductions are limited. Cash donations to charities can't exceed 50 percent of your adjusted gross income. Give more than half your income, and you can deduct excess donations in future years.
Foreign tax credit Uncle Sam taxes us on our worldwide income, so even if you're working outside the country for a year or two you will have to file an income tax return in the U.S., says Bob Scharin, senior tax analyst with Thomson Reuters. But if you paid foreign taxes on the money you earned abroad, you can get a credit for that amount on your U.S. return.
And if the foreign country has higher taxes than the United States, the credit could wipe out your tax bill here.
More than half of the households in the IRS report did pay foreign taxes, Scharin says.
AMT credit Sometimes taxpayers end up owing the alternative minimum tax because of certain situations, such as having exercised incentive stock options from an employer, Scharin says. In these cases, filers get a credit for AMT taxes paid.
Alas, households thrown into the AMT year after year because of common deductions do not get a credit.
Going green Homeowners are eligible for a credit worth 30 percent of the cost of adding solar panels to their houses. This home improvement isn't cheap, although the price has come down and more filers claim the credit, says Thomas Corley, president of the accounting firm Cerefice & Co.
"Let's say you invested $200,000 in solar panels," he says. "You get a credit of $60,000. You could wipe out your income taxes."
Business losses Some of those who didn't owe taxes had a partnership or business formed as an S Corporation, in which they reported the income on an individual tax return, says William Freeland, a tax economist with the Washington-based Tax Foundation. This allowed them to deduct business losses on their return.
And in 2009, when the economy was even weaker than it is now, lots of businesses suffered losses, Freeland says.
Business losses are deducted before adjusted gross income is calculated — so that means these filers still had at least $200,000 in AGI, Freeland says. But the losses still kept income low enough that other deductions and credits eliminated any tax bill, he says.
Some tax experts I spoke with are concerned that the IRS report will cause critics to pick on the rich for not paying their fair share. And they note that plenty of low- to-moderate income folks don't pay taxes, either.
According to Freeland, couples with two kids and income of up to $51,000 don't pay income taxes because of the earned income tax credit and other tax breaks.
And Corley, whose firm caters to high net-worth clients, says his first instinct was to feel sorry for the well-off who didn't owe taxes. That usually means something bad has happened, he says.
For example, a client's house burned down and the underinsured homeowner had to pay $200,000 out of pocket. Losses from property damage are deductible, and this helped erase 90 percent of the client's tax liability, Corley says.
That is a tragedy, but I'm not ready yet to feel sorry for all high earners who don't owe taxes.