Navigating tax season can be a difficult task, even when you aren’t dealing with some of the more complicated things. Deduction and credit are important buzzwords when you are preparing your tax information, and it can be confusing to determine what they actually mean.
At Taxation Solutions, Inc., we want to make sure that you have all the tools you need to do your taxes right, so we’re going to break it down for you.
A tax credit is an amount of money that works against how much you have to pay in taxes. For example, if your taxes come out to about $3,000 and you have $2,500 in tax credits, you will only owe $500. Here are some examples of common tax credits:
- Child & Dependent Care Credit: A credit for any and all of your qualifying children.
- American Opportunity Tax Credit: A credit that helps families and individuals pay for four years of post-secondary education.
- Savers Tax Credit: A credit for eligible contributions to retirement plans in order to encourage low-income households to save for the future.
- Adoption Credit: A credit for the expenses of adopting a child.
- Home Energy Credit: A credit that you can earn for expenses associated with making your home more energy-efficient.
And that’s just to name a few!
A tax deduction, on the other hand, reduces the amount of your taxable income. This means that your overall tax amount will decrease, but deductions affect the base income that determines how much you will owe instead of affecting the owed amount itself. Some examples of deductions are:
- Charitable Donations: A deduction for 50% of the amount of a donation you’ve made to a public charity (30% to a private one).
- IRA Contributions: A deduction for a percentage of your IRA contributions.
- Home Office: A deduction for a percentage of your rent, utilities, and other expenses associated with working from home.
- Medical & Dental Expenses: A deduction of your medical and dental expenses. You may only deduct the amount that exceeds 10% of your adjusted gross income (or 7.5% if you or your spouse is 65 or older).
If you have any questions about tax credits and deductions—especially if this is your first time itemizing instead of taking the standard deductions—please contact Taxation Solutions, Inc. today! We’re happy to help.