Most people have heard of both tax deductions and tax credits. However, if you were to ask the average person to explain the
difference between them, most could not.
However, it’s definitely in your best interest to understand
what each of these things are, as well as how they can benefit you.
Tax Deductions
A tax deduction occurs when you correctly claim a
tax-deductible expense or exemption. Basically, it is something you do in order
to reduce your taxable income and, therefore, pay less in taxes.
Generally, deductions fall into one of two categories. They
are either standard deductions, which are based on your filing status, or
itemized deductions, which are more complex. Itemized deductions are deductions
for which only some people can qualify. Don’t worry, though. There are a lot of
them, and most people will qualify for at least one.
Common things that can qualify a person for a deduction
include:
l Some
medical expenses that exceed 7.5% of your adjusted gross income
l State
sales tax
l Local
sales tax
l Charitable
contributions you have made
A good tax adviser can help you to discover deductions for
which you qualify and then show you how to make the most of them.
Tax Credits
Tax credits, on the other hand, are money deducted from your
tax liability. When you claim a credit for which you are eligible, your tax
liability is therefore reduced by the amount of the credit.
While both tax deductions and tax credits are good things,
credits are particularly good. The reason is that they reduce your tax dollar
for dollar, while deduction related savings are dependent on your tax bracket
and other factors.
Ask your accountant or adviser to explain common credits to
you and to help you determine which ones are relevant to and beneficial for
you.
Whether you end up with credits, deductions, or a mix of both, you can definitely save some money with these two things!
No comments:
Post a Comment
I welcome your comments here :)