17 Feb Are Tax Deductions and Tax Credits the Same?
The simple answer is no.
What they do have in common is that they are both great for your final tax return. Let us take a closer look at these two benefits and what they can offer.
Tax deductions are based on your filing status, wherein a portion of what is due is deducted to reduce your tax bill. You have the option of a standard deduction or an itemized deduction.
● Medical Costs Deductions
● Mortgage Interest Deductions
● Standard Tax Deduction
● Annual Tax Deduction
● Travel Expense Deduction
● Transportation Expense Deduction
An example of a tax deduction and how they work are Medical cost deductions; let’s say your gross income is at $100,000, on a 7.5% base and total medical expenses of $15,000, you would have a total amount of $7500 that you can deduct. If your medical expenses were less than 7500 your tax deduction would be 0.
For standard tax deductions for 2021 the deductions are as follows: $12,550 (single filers), $25,100 (married filing jointly), $12,550 (married filing separately), $18,880 (head of household) and $25,100 (qualifying window(er)s).
Tax Credits are incentives that allow taxpayers to subtract the amount of credit they have used from the overall total that they owe. It can also be a credit that has been granted in recognition of taxes that have already been paid. This credit is a state support.
Here are a few examples of Tax Credits:
● Lifetime Learning Credit
● Child and Dependent Care Credit
● Savers Tax Credit
● American Opportunity Tax Credit
● Earned Income Tax Credit
● Recovery Rebate Credit
Let us take, for example, the American Opportunity Tax Credit. You may be a single parent looking for financial aid so that your child can continue going to college. Or you are currently enrolled but running low on funds from your divorce. The American Opportunity Tax Credit is offered for four years and has a $2500 maximum annual credit per student. For the first $2000 of qualified expenses, 100% will be deducted; these can include books, supplies, and equipment. For the expenditures exceeding $2000, there is a 25% deduction.
The Difference between Tax Credit and Deduction
Between tax credits and tax deductions, credits have a more impactful advantage in reducing your taxable income. A dollar deduction will only reduce your tax by 25 percent, whereas for each dollar from a tax credit, it will reduce your taxes by a dollar. A tax credit will reduce the total amount due to the IRS, which is applied to your bill after you have figured out how much you owe. A tax deduction reduces your taxable income; it is deducted before doing your taxes.
It is also important to note that there are tax benefits that the Coronavirus Relief Measures are providing; ask us at Golden Tax Relief.
If you have any questions on other kinds of support you can get when it comes to your taxes, we invite you to contact the Golden Tax Relief team.