Showing posts with label tax deductions and tax credits. Show all posts
Showing posts with label tax deductions and tax credits. Show all posts

Wednesday, March 6, 2019

Tax Credits vs. Tax Deductions


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!