If you’re not a tax professional, some of the lingo used when talking about taxes might be a little confusing. Today we want to look at two terms that are often confused and which together play an important role in determining how much you are required to pay in taxes: tax credits and tax deductions.
Tax credits and deductions both change your tax bill or refund, but in slightly different ways. It’s important to understand the difference between credits and deductions so that you can know which of these you want to claim, and so you know what records to keep in order to prove your eligibility.
Tax credits
A tax credit reduces your income tax bill dollar-for-dollar.
Some tax credits, such as the Earned Income Tax Credit, are refundable. If your tax bill is less than the amount of a refundable credit, you can get the difference back in your refund.
To claim a tax credit, you should:
- Keep records to show your eligibility for the tax credits you claim.
- Check now to see if you qualify to claim any credits next year on your tax return.
Deductions
Deductions can reduce the amount of your income before you calculate the tax you owe.
Most people take the standard deduction. The standard deduction changes each year for inflation. The amount of the standard deduction depends on your filing status, age, whether you’re blind, and whether you are claimed as a dependent by someone else.
Some people must itemize their deductions, and some people may choose to do so because it reduces their taxable income more than the standard deduction. Generally, if your itemized deductions are larger than your standard deduction, it makes sense to itemize.
If you would like help understanding the tax credits and deductions that you are eligible for, please contact our office.