The general population that is of tax paying age knows what the term tax deduction means: when you pay your taxes, you may get money back called a deduction. While both deductions and credits can save you a significant amount of money on your taxes, they work in very different ways.
First, let’s take a look at what they both are:
A tax deduction is a result of a tax-deductible expense or exemption which reduces your taxable income. A common deduction on your federal income tax return is the standard deduction.
Unlike tax deductions, tax credits are subtracted from the taxes you owe (not taxable income). An example of a common credit is the Child Tax Credit.
If you were ever given the choice between a $50 deduction and a $50 credit, most would prefer to have the credit. Unlike a deduction, that $50 credit reduces your tax dollar-for-dollar. However, a deduction reduces your taxable income by $50. The amount that you receive depends on your marginal tax bracket.
Almost everyone will qualify for the standard deduction. However, the amount varies depending on your filing status, all people with the same filing status receive the same standard amount (the only exception would be those who are elderly, disabled, etc).
There are many itemized deductions and the amount one can get back can vary depending on the individual and the deductions they are eligible for. People commonly itemize:
The individual may receive either a tax deduction or a tax credit, but not both. For those who are eligible for itemized deductions, there is a limit to how much you can receive: you can only exceed your standard deductions. If your itemized deductions totaled an amount less than the standard deduction you qualify for, you likely wouldn’t bother itemizing – you’d take the standard deductions.
To set yourself up for success this tax season, contact us today to schedule your tax consultation. Give us a call at 732-257-8604, email us at firstname.lastname@example.org, or fill out a form on our website. We look forward to being your reliable CPA firm this tax season!