If you’ve ever been confused about the difference between a tax credit and a tax deduction, you’re not alone. These are two of the many items listed on your tax returns. Read on to find out the distinctions between the two.
Tax Credits vs. Tax Deductions
Credits and deductions can directly affect the size of your tax returns. But, what’s the difference between a tax credit and a tax deduction?
If you receive a tax credit, the amount of your overall tax bill can be directly reduced. A tax credit of $500 means $500 is subtracted off your entire tax bill. Some tax credits are refundable, while others are non-refundable. If the credit brings your bill to zero, you won’t get a refund of the difference.
A tax deduction means that your taxable income is reduced. This is done by the percentage of your highest tax bracket.
There are two ways a tax deduction can occur – standard deduction or itemizing. However, you can’t have both.
The standard deduction can be claimed on Form 1040 and depends on whether you file as single, married, or as the head of household.
Itemizing can include expenses such as interest from a mortgage, medical bills, and donations. This can also be based on other factors such as how you file.
Which One is Best for Me?
There is no one option that is better than the other. Both have their own qualifications and benefits and affect you differently based on your personal financial situation.
Tax deduction and tax credit are two terms that require further research when focusing on your tax returns for the year. For example, there are multiple types of tax credits you may be eligible for based on certain situations, such as if you have children or make a certain amount of income per year.
The Takeaway This Tax Season
While this tax season may have just ended, there’s nothing wrong with preparing early for the next one. It is important to gather together all of the information needed for your taxes.
Taxes can be complex and confusing to many. There are so many different factors to consider, and eligibility varies to identify and prove.
Trust the experts at Satty, Levine & Ciacco, CPAs, P.C. to ease the stress of tax season. Visit our website today to view our services.