If you’re looking for ways to reduce your tax bill this year, there are two popular methods that people use all the time. Tax credits and tax deductions. The problem is that many people think they are the same thing. However, in reality, they’re very different tax-saving mechanisms.
While both save you cash, it’s essential to understand which one is best for your specific income and financial situation. That’s where the friendly tax professionals at Maggi Tax come in. We know the differences between tax credits and tax deductions and learn how to utilize them to save you the most on your taxes, so you don’t have to.
Let’s look at the differences between tax credits and tax deductions so you can start saving money on your tax return.
A Quick Breakdown
A tax credit gives you a dollar-for-dollar to lessen your tax liability.
In addition, a tax deduction helps to reduce your taxable income for the year.
Tax Credits – The Basics
Tax credits are designed to help lower the amount of taxes you owe every year. For instance, if you were to qualify for a $1,500 tax credit and you still owe $5,000 in taxes, that credit would reduce your liability by $1,500.
To qualify for specific tax credits depends on several factors ranging from your income and age to your tax filing status. However, while claiming tax credits can result in a bigger refund, some credits are non-refundable. What does that mean? Think of it this way. If credits help reduce your liability to a negative number, whatever’s leftover cannot be used to try and increase the size of your refund.
If you have a refundable tax credit on your tax return, it works to boost your tax refund. One of the most common refund-boosting tax credits is the Earned Income Credit. There’s also the American Opportunity Tax Credit, which is partially refundable.
Here are some of the other most common tax credits:
- Child and Dependent Care Credit
- Adoption Credit
- Child Tax Credit
- Premium Tax Credit
- Saver’s Credit
- Lifetime Learning Credit
Tax Deductions – The Basics
Tax deductions are designed to reduce the taxable income you have for the year. If you are going to make tax deductions, there are two ways to claim them. The first option is to claim the standard deduction, which is the type of deduction that any taxpayer can claim. The amount you can deduct depends on your filing status. Remember that the largest standard deduction is reserved for married couples filing a joint tax return.
Now, if you don’t want to go the standard deduction route, the other option is to itemize your deductions instead. If you choose to itemize, you will need to list out individual expenses that you want to write off on your taxes. A key thing to remember is that itemizing is the way to go if your total deductible expenses are higher than what you qualify for on your standard deduction.
Let’s look at a few examples of deductible expenses for the 2021 tax year. Most of these must be itemized, but others are above-the-line deductions that can be claimed as separate deductions even if not itemized.
- Charitable donations
- Mortgage loan interest
- Medical and dental expenses
- Tuition and fees
- Contributions to a traditional IRA
- Contributions to health savings accounts (HSAs)
- Mileage for business travel
- Unreimbursed business expenses
- Moving costs to start a new job
- Job search expenses
- Teacher’s educational expenses
- Property and real estate taxes
It’s important to remember that your ability to claim certain deductions is based on your filing status and household income. And also, that you cannot claim a tax credit and a tax deduction for the same expense.
These tax burden-reducing options are effective, but they help reduce your tax liability in different ways. It’s essential to understand the differences between the two and know how to use them for your benefit.
That’s where the tax pros at Maggi Tax come in. We have the knowledge, experience, and expertise to help you understand which deductions or credits are right for you. Want to see how we can help you save the most on your taxes? Call the friendly tax professionals at Maggi Tax at (813)-829-1807 today.