Tax Deductions and Tax Credits Debunked

Tax deductions and tax credits are similar, but they are not the same thing. As we approach tax season, it is good to know the difference when you go into the accountant’s office. While most accountants will help you figure these things out when you come into the office, you will want to have a good idea about what these things are.

 

Tax Deductions

 

Tax deductions reduce the amount of taxable income that you can claim at the end of the year. For example, you can deduct the interest that you pay on your mortgage from your taxable income each year. If you make $40,000 a year, and you pay $2000 in interest on your mortgage, then you can claim $38,000 in income. This in turn reduces the amount of taxes that you have to pay because it reduces the amount of income that you claim. This is called the Mortgage Interest Deduction, and it is only one example of a tax deduction.

 

Tax Credits

 

Tax credits are similar, but they reduce the amount of taxes that you owe without affecting the amount of taxable income that you can claim. For example, the Hope tax credit is designed to help people pursuing an education. With this tax credit you can reduce your taxes by up to $1800 when you claim that amount of educational expenses. You have another tax credit that you can claim if you have dependent children, and up until 2010 there was a first time homeowner’s tax credit.

 

Some tax credits are considered refundable tax credits. This means that if you can claim a tax credit that is higher than the taxes that you owe, you will receive the difference as a tax refund.

 

Some people think that tax credits are the better of the two because they directly reduce the amount of tax that you have to pay, but both credits and deductions can be very helpful in reducing the amount of taxes that you owe. For tax credits and tax deductions, it is important to know which ones that you can claim each year.


 

Fortunately, many accountants will ask you specific questions and go through your financial records to see which deductions or credits you can receive. However, before you go into the accountant’s office, you should take some time to look for credits or deductions you might be able to claim.


 

If you have a house, a child or even energy efficient appliances, you might be able to receive a tax credit. Many people contribute part of their income to a retirement account of some sort, such as a Roth IRA. You can receive a tax credit for up to 50% of the money that you contribute to these accounts. This tax credit is not a refundable tax credit. In addition to these tax credits, you can often find tax credits that are designed to help businesses, especially small ones.

 

When it comes to tax deductions there are many that apply to specific situations. This means that many of these deductions might not apply to you, but many of them might. For example, if you have made any charitable contributions during the year, you can deduct that donation from your taxes.

 

Even if you contributed canned goods to a food drive, you can deduct that cost from your taxes. You can get a deduction if you pay for childcare, if you help your children pay student loans, if you spent money searching for a job, or if you traveled on business (generally just the self-employed).

 

It is partially your responsibility to research what deductions and credits apply to you, though a good accountant should find them for you. Keep your receipts and keep up with the things that you spend money on throughout the year, and you will be well-prepared come tax time.

 

What tax credits or tax deductions have you used in the past?

 

Comments

  1. I would have to say most people don’t know about the child tax deduction.. I like the fact that couples get $1,000 credit for every dependent under 17 years old, but it’s hard to swallow, the more children you have or dependents under 17, the less likely you’re going to get that full credit. In other words, it’s not fair to put an amount on the number children a couple has.

  2. Well, I guess I didn’t know as much as I thought.

  3. Thankfulness to my father who informed me concerning this blog, this

    weblog is truly remarkable.

  4. Tax deductions are good but I would rather decrease the number of kids instead of trying to get max child tax credit. hehe…

    • You make a great point here. The cost of children out way the deduction or credit you can get for them.

      • Very good point indeed. Having children is one of the most important decisions you will ever face. And something that can be avoided completely. I favor removing the Credit alltogether. It seems to only benefit those who have children. Again, a decision everyone has the power to control. Why do I pay for other people's kids?

        I have two btw and do not qualify for the credit.

        • The credit is namely to help lower income people. If you don't qualify for the credit it's not a strike against you it's basically saying "hey you great job on making too much money". Also there are tons of things that we pay for that we can't take advantage of or for other people. Public school education, social security, free lunches, etc etc etc… If I send my kids to private school should I have to pay for your public schools and free lunches? I tend to believe taxes are what we pay to live in a civilized society. Some credits/deductions are needed to keep people afloat.

  5. I love tax credits :) Deductions are cool too, but I'm a student, so I get tuition and textbook tax credits which diminishes my taxes to almost nothing. I also love that it's easy to figure out how much I'll get back at the end of the year – or owe – with tax credits.

    My boyfriend qualified for the dependent tax deduction because I used to make under a certain amount each year – he wont' be qualifying for that this year though.

  6. I never get to use the child tax credit, but I've been happy the last couple years that I can deduct sales taxes paid since I'm in a state with no income tax. Each year I worry that the government will let that one expire. I pay plenty of taxes at the local level, why should the method of collection be an issue with how I pay my federal taxes?

  7. I'll finally get to use the child tax credit this year. Hopefully it will help. I probably will still have to send the IRS a check because I didn't withheld any tax. :(

  8. I've gotten the $1000 child tax credit for the past 2 years running and that is huge. $1000 deduction would be nice, but a credit has meant a refund the past 2 years.

    • Nice! What do you plan on doing with the credit?

      • It will be going into my sinking fund to maintain my visa status here in Thailand. I am required to have 400K THB in an account to renew my yearly extension in September. That is about $13k USD and this will be going to help fund it. It is also about 6 months living expenses so helps me keep a rolling emergency fund.

        • So, because of the credit, you get other peoples' money back so you can live in another country? How is that good?

          • No Bubba I get my own money back. I've paid taxes every year since I was 16 and last year (2011) was no exception. It is a tax credit on my own taxes paid, it doesn't come from other peoples money. And I also received it in 2010 while still living in the U.S. In any case, my country of residence is immaterial as the IRS is kind enough to tax me on all my income no matter where in the world I live. I believe that U.S. citizens are the only people in the world to be enjoy their government following them to collect taxes no matter where they choose to live and work. So, I suppose you could say that you are all benefiting from my contributions, even though I am not present in the U.S. to get any benefit from them.

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    Tax Deductions and Tax Credits Debunked…

    Tax deductions and tax credits are similar, but they are not the same thing. As we approach tax season, it is good to know the difference when you go into the accountant’s office. While most accountants will help you figure these things out when you co…

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