Tax deductions and tax credits are two items that can lower your taxes in a big way. They sound similar, and to the uninformed may be confused as synonyms. They are not.
A tax credit is usually the better of the two because it reduces your tax liability dollar-for-dollar. Deductions also lower your tax bill. They do so by lowering your gross taxable income and hence provide you with tax savings as well.
Tax credits and deductions can have a big impact on your tax bill. In fact, some estimates suggest that if your income falls below $75,000 for 2021, you may end up paying no federal income tax, based largely on eligible tax credits, deductions, and COVID benefits.
The United States Federal Tax Code
Before we get into some examples of tax credits and deductions, let's take a brief look at the federal tax code itself. All the rules and regulations covering federal taxes are contained in the Internal Revenue Service (IRS) tax code. It's an incredibly large and continually tinkered-with set of documents—one estimate places it at over 74,000 pages.
Legal tax deductions and credits are spelled out and embedded in the tax code. Because of this, if you are new to tax filing, or your tax situation has changed, it may be prudent to seek professional help in order to uncover all the deductions and credits that you are entitled to.
In the United States, the burden of filing an on-time and correct tax return falls onto the taxpayer. Many people put this process off until the very end. In order to pay the least amount, however, you'll need time to research any credits or deductions that you may be entitled to. Make sure that you begin your tax preparation and filing process early so that you can prepare your filing to your best advantage.
A deduction cuts the income you're taxed on, which generally translates to a lower tax bill. You simply subtract the amount of the deduction from your income before you calculate your tax. Keep in mind that to get some of these benefits you may need to itemize your deductions. If you don't itemize, you can always take the generous standard deduction ($25,100 for married taxpayers; $12,500 for individual filers).
Here are some of the more common tax deductions that you may be entitled to:
- Student loan interest
- Charitable donations
- Self-employed social security taxes
- Mortgage interest
- Medical expenses
- Business expenses
- Certain alimony expenses
- Certain IRA contributions
- Casualty losses in a federally declared disaster
Some of the more overlooked deductions that may apply to you include:
- State sales tax
- Moving expenses to take your first job
- Mortgage points
- Jury fees paid to an employer
- Gambling losses
If you run a small business, there are several deductions that might appeal to you. These include educational expenses that you pay for training or certification of your employees, start-up expenses such as pre-launch advertising and consulting fees, and, potentially, a home office deduction.
Various tax deductions are available if you are a landlord. These include most improvements. But be careful, one-off repairs do not qualify as property improvements.
Tax credits lower your tax burden as well. They are claimed as dollar-for-dollar subtractions right off your calculated tax bill. Because of this, they can be even more valuable than tax deductions. Some of the most popular tax credits include:
- Earned Income Credit
- Child Care Tax Credit
- Foreign Tax Credit
- Lifetime Learning Credit
- American Opportunity Credit
- Installation of certain energy-efficient products
The Biden Administration is working with Congress to expand many of these credits, especially those that preferentially help low-income Americans. The American Rescue Plan Act, already passed by Congress, includes the expansion of tax credits for qualifying taxpayers with children.
How Can Chandler & Knowles Help?
Getting personal or business taxes done correctly while at the same time paying the least amount you legally owe can be a stressful and time-consuming process. Using tax deductions and credits is a great way to do so. There are, however, so many, and very few nonprofessionals that know all of them.
It may be prudent to seek professional, ongoing help with your tax preparation and tax planning. Chandler & Knowles, LLC is a full-service CPA firm with extensive knowledge and experience with personal and business tax. Not only will we uncover all the deductions and credits that you qualify for, but our forward-thinking, strategic approach to taxes will also ensure that your filing is done expertly, on time, and with minimal stress. Contact our team today to get started.