Tax deductions and tax credits reduce your tax liability, but they do so in different ways. The good news? Both help you save money at tax time. Even better news? You don’t have to choose one or the other. In fact, you can take as many as possible for your tax situation. Here’s what you need to know about deductions and credits when you file.
- Lower your taxable income
- Can be taken as either standard deductions OR itemized deductions (Itemized deductions are typically used if your total exceeds the standard deduction. Deductions that directly reduce income include moving expenses, traditional IRAs, alimony payments and more.)
- Cannot reduce your taxable income below zero
- Can be limited by your adjusted gross income (AGI)
- Are valued based on the percentage of your tax bracket
Example: If your tax deduction is $2,000 and your tax bracket is 25%, you would save $500 on your tax return.
- Directly reduce the tax you owe
- Can be taken whether you itemize or not
- Some are refundable and may reduce your tax liability, and if they are more than your tax liability, you can get an additional refund
- Some are non-refundable, so your tax liability cannot go below zero or be used to get a refund
- Depend on things like your age, employment, filing status, children and/or attending post-secondary education to qualify
- Are valued in dollar amounts and are the same for every taxpayer who qualifies
Example: If your tax credit is $2,000, your tax liability is reduced by $2,000.
Contact a tax professional to ensure you’re including all of the deductions and credits that you can on your tax return, and help find the best ways to boost your refund. Gather up your documents with this tax interview checklist and visit your nearest Liberty Tax. Follow us on Facebook and Twitter for more tax time tips.
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